It's hard to hide being naughty when your misdeeds are projected on an eight-story-tall screen with booming, state-of-the-art surround sound. That's about the size of the larger IMAX (NASDAQ:IMAX) screens, and even though I still believe that the company's product will help save the movie theater industry -- I wouldn't be sticking with it as a Motley Fool Rule Breakers pick if I didn't -- I'm loading up the IMAX stocking with lumps of coal for some of its blunders in 2006.
How do I lump thee? Let me count the ways.
1. The botched sale
Back in March, the company put itself up on the bidding block. With movie studios like Time Warner (NYSE:TWX) relying on IMAX to deliver more box-office punch, providing gargantuan experiences at premium ticket prices, it was easy to envision a line of prospective suitors including movie studios, private equity firms, and cinema chains.
Things began to heat up a couple of months later, when Globe and Mail reported that four companies -- including Sony (NYSE:SNE) -- were participating in a second round of buyout offers, supposedly pricing a deal in the $12-to-$14-per-share range. Two weeks later, the stock was cut in half after the company announced that it had failed to receive a satisfactory buyout offer. Was the offer not enough for a premium at the original price -- or when it dipped below $5 on the grim news?
2. The botched accounting
The bad news didn't end there. The SEC was also initiating an informal inquiry into the company's revenue-recognition practices. Was the company booking installation revenue prematurely? In an ominous sign, the CFO packed his red Swingline stapler and bolted from the company after the SEC began snooping around.
3. The hollow third quarter
As if things weren't bad enough, the company shocked investors with a disastrous third-quarter report. Despite a healthy backlog of new system orders, the company did not book a single installation during the period. Film revenue is holding up well at IMAX, but the beefy installations all over the world had been propping results higher. Analysts took a hose to their near-term profit targets following the lackluster showing.
4. Bad twins
Am I allowed a rant here? Apart from the malaise, I'm annoyed that IMAX has two CEOs in place. As if that weren't bad enough, when you see an IMAX chieftain quoted in a press release, the quote is attributed to both Richard Gelfond and Brad Wechsler. So you get nuggets like this, from last month's press release:
Messrs. Gelfond and Wechsler stated, "We strongly view the introduction of a digital IMAX system in 2008 as being potentially very beneficial to the Company."
I'm not naive. I realize that press-release CEO quotes are often spun by publicists before getting executive approval. But do we really need to connect these two guys at the hip, even in speaking roles? I interviewed Gelfond last year for Rule Breakers subscribers. Not once did I hear Wechsler chime in to harmonize.
I think IMAX has a great product. I think the share price is ridiculously cheap. However, I think management has created its own prison here. (Yes, Gelfond and Wechsler can share a proverbial cell if they want.) The stock has the potential to bounce back as a huge winner in 2007 -- perhaps with new blood at the helm -- but for this holiday season, it's getting nothing but coal from me.
There's a whole world of naughty and nice out there! Take a lookat the rest of the bunch.
IMAX was recommended last summer to Motley Fool Rule Breakers newsletter subscribers. No, it hasn't gone well; you can read the original recommendation and have access to all of the growth stock picks with a free trial subscription. Thankfully, the newsletter's average pick has beaten the market convincingly. Time Warner is a Stock Advisor pick.
Longtime Fool contributor Rick Munarriz loves to spot great things early. It's why he's been with The Motley Fool since 1995. He does not own shares in any of the companies in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
