Everyone Loves Explosions! (Profits, Too)
T. M. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's our tendency to always want bigger, better, more exciting experiences, and film has sought to deliver, decade after decade. The latest sweeping, truly cinematic films like The Dark Knight Rises have used IMAX' (NYSE: IMAX) proprietary technology to accomplish their impressive and overwhelming cinematography. Director Christopher Nolan's express disinterest in 3D for his trilogy, even as the technology saw increasing use across the industry and internationally, has brought attention to what is seen as a decline in the profitability of the kind of 3D movies RealD, Inc. (NYSE: RLD) makes possible.
$1.3 billion IMAX is currently trading at 75% of its 52-week high; the $500 million RealD, is at 59% of the same period's high. Are they on their way out, yet another gimmick of our time, to be discarded like mighty Smell-O-Vision? Or are these companies underpriced as we head into the lucrative fall/winter season for theaters and ripe for the plucking by those initiated into the (not so) secret league of Fools?
But We Are Initiated, Aren't We?
Both companies are betting that future growth will be seen overseas, with BRICs seeing the greatest expansion for IMAX and RealD. IMAX has continued to expand its interest in China and India, while RealD has also tapped into the Chinese market, along with recently opening an office in Russia.
For IMAX, efforts have seen a 27% rise in sales in June's quarterly statement; the cost of making these sales has declined, on average, 4% per quarter this past year. Over the past three quarters IMAX has managed a 78% average growth in net cash; briefly, IMAX is increasingly profitable and efficient in how it acquires those profits.
Their current ratio is slightly below the comfort level at 1.5, but the company is nevertheless not particularly swamped by debt or other liabilities; indeed, receivables have remained relatively stable, and long term debt has dropped to 0 in recent years. Though trading at a P/E of 45, analysts believe that based on future growth IMAX is trading at only 70% of its actual value. This is just above the Fool's preferred PEG ratio, but still suggests a notably undervalued stock that could easily shoot up if IMAX's earnings continue their trend.
The Poor Man's Laika?
RealD has been tumbling, tumbling, tumbling in price since the highs of June and July on news of its aforelinked expansion into China and Russia, along with a late-July earnings report that underperformed estimates and saw margins drop. Nevertheless, sales have increased nearly 20% on average the past three quarters; in RealD's particular business model, where 5-cents on the sale of a ticket to one of their screens goes to RealD, sales translate to a continued source of revenue in the future, one which eventually pays off the cost of the sale -- by some estimates within 16 months of installation.
While the cost of those sales has increased by 11%/quarter on average over the same period, RealD's massive acquisitions in China suggest that the initial investment inherent in that expense will eventually be paid down. With a current ratio of 2.2, the infrastructure they've set in place is more than enough to offset recently-acquired debts.
Nevertheless, net cash has dropped 35% from last quarter; while still profitable, it is definitely less so, with its EPS declining 50% from last quarter. A PEG ratio of -18 suggests that analysts are certainly bullish about RealD's ability to bring in returns.
As It Turns Out, This Article Isn't About 3D!
If you want to invest in 3D film-making, but want something with a higher market cap (and the hypothetical stability it suggests), $3.4 billion Dolby (NYSE: DLB), with its attractive P/E of 12, could be your stock. Dolby hit its 52-week high in May, and has since dropped 30%; with a PEG of 4.4, though, analysts are betting that Dolby has further to fall.
The majority of Dolby's revenue is due to its licensing of its proprietary audio technology; the cost of lisencing was only 1.2% of the revenue brought in. Conversely, products like Dolby 3D -- which, unlike RealD, is a one-time-only installation cost, with no continuing licensing fees -- brought in only 10% of the past quarter's revenue, and 65% of that revenue stream was eaten up by costs. In other words, Dolby 3D is not nearly as profitable as Dolby's other technologies. Dolby's recent deal with Amazon (NASDAQ: AMZN) over using their proprietary audio technology in the Kindle Fire HD tablet suggests that this revenue stream may see a serious increase; analysts currently down on Dolby for its reliance on licensing may become more bullish were that the case.
On average over the past three quarters, Dolby's net operating cash is up 85%; ultimately, it's a profitable business and, for the moment, increasingly so. Their current ratio is a whopping 7.7, with no long term debt to speak of. Buoyed as it is by its consistent returns on licensing, if Dolby can expand its line of products and succeed in the tablet market, it is not just a safe buy, but one that may climb in the coming years.
Epilogue II: The Prevaricating
While IMAX seems like a safe buy -- its financials are sound and it has been consistently profitable -- its relative health might give a bargain hunter pause. It's definitely not priced cheaply, but then, why would a widely recognized healthy brand be anything but? Meanwhile, RealD is certainly on the ropes and insider sales of the stock do not inspire confidence, but the company is still making moves like an international competitor in its sector, and today's losers are, after all, tomorrow's winners.
tmloyd has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Imax. Motley Fool newsletter services recommend Amazon.com, Dolby Laboratories, and 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.