IMAX: Maximum Growth, Minimum Risk

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past decade, IMAX (NYSE: IMAX) has become synonymous with the premium experience of watching Hollywood blockbusters - on a screen as high as 98 feet with over 40 speakers. It wasn’t always this way - for the first three decades after its debut in 1971, IMAX was restricted to special presentations at museums and educational venues, since technical limitations kept films short, at approximately 40-50 minutes.

In the early 2000s, however, its film-making and projection technologies were modified - later digitally - to accommodate feature-length films. This key advance, combined with rapidly improving computer-generated special effects in high-budget films, created a market for IMAX projectors and screens to gradually replace traditional movie projector systems.

Propelled by rising demand for its projection systems, increasingly technically impressive films, and evolving 3D technology, has IMAX become a perfect stock to own to capitalize on this revolution of modern film entertainment?

How does IMAX make money?

During the fourth quarter of 2012, IMAX earned an adjusted 23 cents per share, easily topping the analyst estimate of 16 cents. Net income grew 105.9% from the prior year quarter to $12.9 million.

Sales from revenue sharing agreements - in which IMAX takes a cut of the movie profits - rose 103.4% to $17 million. IMAX currently holds revenue sharing agreements with AMC EntertainmentRegal Entertainment (NYSE: RGC) and Cinemark Holdings (NYSE: CNK).

However, IMAX’s revenue from systems sales dropped 18.5% to $24.3 million, since it only installed 14 new systems in theaters during the fourth quarter, as opposed to 17 a year earlier.

Yet that slip shouldn't worry investors - looking ahead, the company has already signed contracts to install 38 new theater systems (28 in new locations) going into the new fiscal year. IMAX's wide-reaching revenue sharing arrangements show that theater companies are quickly realizing that IMAX has become the de facto industry standard.

The remainder of IMAX’s revenue is generated from periodic system maintenance fees, theater operations, and its own branded films.

Total revenue grew 16.6% to $77.8 million, also ahead of the $74 million that analysts had projected. Gross box office revenues for IMAX titles rose 55.7% to $152 million - a record for the company. The average box office per screen rose from $221,600 to $264,400.

CEO Richard Gelfond offered a clear explanation of IMAX’s primary goals:

“Our 2013 objectives are straightforward — continue to expand our footprint worldwide, maximize the scalability of our business and further leverage our differentiated end-to-end technology platform to enable more leading filmmakers and studios to create an entertainment experience that cannot be found anywhere else.”

Top and Bottom Line Growth

IMAX’s top and bottom line have grown 104.1% and 363.6%, respectively, over the past ten years.

IMAX Revenue TTM data by YCharts

Although earnings are slightly inconsistent, mainly due to the recession, it was still profitable for seven of the past ten years. Looking forward, analysts at Thomson Financial estimate that IMAX will earn $0.98 per share for fiscal 2013, and follow that up with $1.35 per share in 2014.

Revenue growth was also higher in 2009 and 2010, prior to sliding slightly in 2011. According to analyst projections, however, IMAX’s revenue is expected to rise 9.5% to $311 million in fiscal 2013, and 15.7% to $360 million in 2014.

In my opinion, these positive catalysts are just the beginning for IMAX, as demand for its large projection systems rises domestically as well as overseas.

Overseas Growth

China, the world’s second largest economy and a population of 1.3 billion, has a rapidly growing middle class. IMAX currently operates 92 theaters in China, and is planning to open 133 more in busy urban areas. China’s strong interest in movie theaters was reflected in Dalian Wanda Group’s $2.6 billion takeover of AMC Entertainment last year.

IMAX is also enjoying strong demand in Western Europe, Japan and Russia. The company currently operates 643 IMAX theaters in 52 countries.

Major Movie Releases & 3D

As long as IMAX is on fire, then it needs some good, effects-laden Hollywood offerings to act as kindling to keep it burning. Last year was a strong year for movie studios - blockbusters such as The Hunger Games, The Avengers and The Dark Knight Rises all drew in record crowds. This year, films such as Skyfall, The Hobbit, Jack the Giant Slayer and Oz: The Great and Powerful are continuing the trend.

IMAX is an excellent play on apparent insatiability of movie watchers for one main reason: it doesn’t have take the multimillion dollar risks that studios such as Time Warner or Walt Disney (NYSE: DIS) have to shoulder to create films. IMAX merely has to use its technology to show the films, and with each film shown, its technology is showcased to more users, helping its popularity spread further.

3D technology, which became immensely popular after the 2009 release of James Cameron’s Avatar, has also fueled demand for the 3D IMAX experience, which is considered the top-tier experience for viewing major film releases.

Considering Disney’s ambitious plans for its Marvel franchises and its upcoming Star Wars sequels, I believe that “3D IMAX” will remain the premium standard for a long time.

Versus Competitors

Thanks to its niche market and peerless brand recognition, IMAX does not have any direct competitors - rather, they can be considered partners that help spread its brand. However, IMAX’s growth can still be measured against other major movie theater operators, to see how it stands fundamentally.

  Forward P/E 5-year PEG Price to Sales (ttm) Return on Equity (ttm) Debt to Equity Profit Margin
IMAX 19.86 1.36 5.96 18.54% 4.35 14.58%
Regal Entertainment 14.67 1.58 0.83 N/A N/A
($2.01 billion debt)
5.13%
Cinemark Holdings 13.02 0.96 1.25 16.18% 176.11 6.83%
Best Value Cinemark Cinemark Regal IMAX IMAX IMAX

Source: Yahoo Finance, March 9.

Based on these metrics, we can see that IMAX is trading at a premium, albeit a well-deserved one, considering its beefier margins and lower debt levels. While Cinemark has grown over the past five years, its growth has been slow in comparison to IMAX. The reason is simple: whereas Cinemark and Regal must increase their expenses to adopt IMAX technology in their aging theaters, IMAX simply profits from the shift.

RGC Revenue TTM data by YCharts

Regal Entertainment has fared the worst over the past five years, despite fairly strong growth in earnings. However, dwindling top-line growth sank Regal’s shares, which have performed the worst.

IMAX data by YCharts

The Foolish Bottom Line

Investing in IMAX depends on one central thesis - will movies get progressively bigger and more dazzling, requiring the largest screens enhanced with 3D technology to view in their fully intended glory?

If so, then IMAX - with its growing brand, insulated business model, coupled with strong top and bottom line growth - just might be one of the strongest investments of this decade.


Leo Sun owns shares of Walt Disney. The Motley Fool recommends Imax and Walt Disney. The Motley Fool owns shares of Imax and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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