Building to a Cl-IMAX

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

While IMAX (NYSE: IMAX) has to rely on blockbuster movies to really move earnings, the company showed in its recent earnings report what it can do when a few blockbusters are released at once. IMAX needs blockbusters like The Hunger Games and The Amazing Spiderman to really perform well. This is not an ideal setup as I like to see more consistent business that doesn't rely on studios, the company is performing well and the larger the IMAX network grows, the better the numbers should get. Let's take a look at what's going on with this premium theatre concept and figure out what investors can expect in the future.

The movie industry has been in a slow decline for a while, but the trend isn't universal. There are certain companies that are managing to grow through organic expansion. IMAX was hurt last year by the lack of multiple big name blockbuster movies, but so far 2012 is looking much better. Given some of the movies that are due to be released in 2013, next year should be a good year as well. IMAX competes with companies such as RealD (NYSE: RLD) for higher-end movie ticket sales. The company also works with and competes against traditional movie complexes such as Regal Entertainment (NYSE: RGC) and Cinemark Holdings (NYSE: CNK). What all of these companies have in common is the need for studios to keep producing movies that audiences want to see enough to go spend money to see them right now. This is the real challenge for studios, make a movie that isn't just good, but that the prospective audience feels that they have to see it now instead of waiting for it to come out on video. That's the difference in the industry today, years ago it seemed to take forever for movies to come out on video and the only way to watch them was to go rent the movie from your local Blockbuster on VHS. The quality of the video and sound was acceptable, but the movie theatre was so much better. Today with Blu-ray and DVD as well as digital video copies, the quality gap has become smaller between paying $9 or more a person to watch at a theatre versus just waiting for the film to come out on video and watching it at home. This threat hurts traditional movie complexes, and that is where IMAX comes in.

The company isn't interested in making movies in 3D, which is one of the major focuses of RealD. While audiences might not find the 3D experience that impressive for a standard movie, a blockbuster film like The Amazing Spiderman is a different story. I can honestly say that seeing this movie in RealD 3D in my opinion was one of the best movie experiences I've had in a long time. The 3D experience is less about having things fly off the screen at you, and more about adding more depth to the picture. This was a huge positive for The Amazing Spiderman and I didn't care as much about the price of the ticket because the experience was worth it. This is the same effect that IMAX is shooting for. The company wants to immerse viewers in the film, instead of just showing it on the screen. When the audience feels like they are a part of the film, it gives them an escape for a few hours that most people would be willing to pay a few extra bucks for. This concept of higher quality digital images and sound was proven as a viable sub-set of the movie industry by IMAX by their recent numbers.

The company saw revenue up 23%, and EPS increased by 200%. IMAX installed 20 systems bringing their theatre count to 663. In addition, the company still has a backlog of 280 systems and management expanded their estimate of total systems to 1,700 from a previous estimate of 1,500. This used to be a knock that short-sellers had on IMAX was the limited total theaters that the company believed were possible. With this maximum number having increased twice in the last few years, this argument is less valid than it used to be. Two of the three major divisions of the company saw massive growth with seemingly more to come.

The company's Production and IMAX DMR division saw revenues up 58.87% and Joint Revenue Sharing Agreements revenue increased by 87.95%. With about 41% of the company's systems operating under this joint-revenue set up, nearly 88% growth is extremely impressive. The challenge that makes IMAX's results somewhat unpredictable is the company's IMAX Systems unit. In this division, the company signed 40 new systems, versus 52 last year so it seems further difficult comparisons lie ahead. The good news for investors is the company had several positives to mention in their outlook for the rest of 2012 and into 2013.

IMAX expects 110 new theaters for the full year, and announced that two feature films that are slated for next year will use IMAX cameras for segments of filming. This is the part of the company's earnings that is somewhat more predicable. Blockbuster movies usually equal better results. For the remainder of 2012, there are two big hits still left. The first is one that is already in theaters and that is The Bourne Legacy that has had a good opening. The second big hit is expected near the end of the year and that is The Hobbit: An Unexpected Journey. Next year has at least four solid blockbuster films lined up with the Star Trek Sequel, Man of Steel, The Hunger Games: Catching Fire, and The Hobbit: There and Back Again. These pending big films should drive viewers into the theaters and improve results for both IMAX and its competition.

For investors looking for the best expected growth rate from the pending increase in movie sales, IMAX is the clear growth leader. The company is expected to grow earnings by over 21% for the next few years on the back of increased theatre signings and the expected higher maintenance income from its larger theatre base. RealD is expected to grow at about 18%, but sells for a forward multiple that is almost twice IMAX. Where Regal and Cinemark are concerned, you can tell that both companies are expected to benefit from the increase in movie ticket sales with both companies expected to grow earnings at 12% or more. Though Regal and Cinemark both pay dividends and IMAX does not, the difference is IMAX is a fast growing chain that has plenty of worldwide appeal based on the significant number of theatre signing in China. The company is expanding its theatre base and as this expands the company's income will become more predictable because of ongoing maintenance required for these high-end systems. With a bigger network able to capitalize on these upcoming blockbuster movies, IMAX investors should be happy that the company is beginning to reach the cl-IMAX of their earnings potential.

MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Imax. Motley Fool newsletter services recommend Imax. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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