Investors looking to cash in on the 3-D craze take note: rather than betting on a volatile box office, your best bet might be with companies that make possible watching and screening movies in three dimensions
With three-dimensional viewing all the rage at the local Cineplex - thanks largely to James Cameron's Avatar - RealD, the top supplier of U.S. 3-D theatre projection gear, is set to make its debut July 16 with strong expectations for its initial public offering.
Analysts advise buying into infrastructure companies like RealD for now, rather than bet on box office fortunes or the theatre chains sinking billions of dollars in upgrading to carry 3-D.
"The 3-D market is an embryonic growth market right now. If you get in early with a company that dominates the segment, you could do well," said Francis Gaskins, president of IPOdesktop.com.
Analysts spy hidden gems among smaller hardware and services vendors such as RealD. They favour companies that focus on hardware to aid the upgrade or film-conversion to 3-D, or that provide technology to screen it.
Media Valuation Partners principal Larry Gerbrandt likened the boom to high-definition TV, when the likes of Technicolor SA's Grass Valley - which made broadcast switches needed for the transition - became early beneficiaries.
"It's more of an infrastructure play. You can't point to any one company and say they're going to be the 3-D play," he said. "It's one of these things where, over time, the whole infrastructure gets upgraded to 3-D."
The 3-D film business has mushroomed since Avatar became the highest-grossing movie of all time. Hollywood is cramming its release schedule with high-profile films like Toy Story 3. And theatres are scrambling to upgrade screens for 3-D - an estimated $3-billion exercise in North America alone.
The question is where to invest.
Marla Backer, analyst with Hudson Square Research, likes Ballantyne Strong Inc. - which prepares cinemas for digital projection. That's despite the Omaha, Neb., company's stock price more than tripling to $7.50 (U.S.) from $2.20 in the past year - to a pricey 29 times estimated 2010 earnings.
Carmike Cinemas Inc., a small theatre chain, has a greater proportion of 3-D screens than larger competitors - about 500 out of 2,200 - and would thus be a disproportionate beneficiary of the 3-D craze.
And she likes Imax Corp., with its seven-storey screens, as a popular showcase for such movies.
Less certain is whether big-name cinema chains and studios actually make money, longer-term, off this emerging technology.
Exhibitors such as Regal Entertainment have charged up to $5 on top of a standard ticket for 3-D films. But some analysts suggest 3-D is already showing signs of weakness.
BTIG Research analyst Richard Greenfield said box office revenue from 3-D screenings is already declining. Walt Disney Co.'s Toy Story 3 made 60 per cent of its opening weekend gross from 3-D, compared with 70 per cent for Alice in Wonderland in March.
"With the economy still recovering, we worry that movie exhibitors' view of consumer demand for 3-D is disconnected from reality," he wrote.
Infrastructure may be a safer bet. Of some 130,000 screens globally, only 10,000 are 3-D enabled. More than 5,000 theatres carry RealD 3-D equipment and it said it has deals to convert another 5,000.
If RealD's IPO take-up is strong, that might encourage others. Some are already plugging rivals such as X6D Ltd., which sells under the Xpand brand, and Burbank, Calif.-based MasterImage 3-D.
"RealD is the biggest by far in the U.S., but I'd say MasterImage and Xpand will give RealD a run on the global business and will make inroads in the market domestically," said Scott Hettrick, editor of 3-DHollywood.net.
RealD competes with audio equipment maker Dolby Laboratories Inc, which also sells 3-D projection systems for theatres. Eric Cohen, corporate development vice-president for Dolby, told a tech conference in New York that the company's 3-D systems are installed in about 3,300 cinemas worldwide.
Burbank-based 3ality Digital is a maker of 3-D cameras that industry sources also peg as an IPO candidate.
"Business is growing at an extraordinary rate and we expect to be profitable in 2010," 3ality CEO Sandy Climan said.
Outfits that convert regular film and television shows into 3-D may be another choice investment, analysts said. One expert pegged the market at $35-billion in the next five years.
Filming live-action 3-D is costly and untested, apart from Avatar. Conversion is more of a known quantity and can fill a home-entertainment market for 3-D content. IMS Research expects over 200 million 3-D-equipped TV sets to be shipped by 2015, and Hollywood cannot turn out new movies fast enough.
Conversion costs range from $50,000 to $150,000 a minute per film, depending on the visual challenges involved.
Prime Focus, a company started in India that has grown to 1,200 employees and become one of the largest players in 3-D conversion, was stung by bad reviews for its job on this year's Clash of the Titans. Its London share price fell 4.5 per cent after the movie's release, but has since bounced back.
Other major players in the arena are In-Three Inc., Legend 3-D and Sony Corp.'s Imageworks. All worked on Alice.
"The conversion companies will do a big business over this next period," said Michael Peyser, a movie producer who teaches in the University of Southern California school of cinema.
Rob Hummel, Prime Focus's post-production chief, said his phone is already ringing off the hook.
"I want to get us so we never have to say no," Mr. Hummel said. "We tell them, 'You better book us soon because if you don't book us, someone else will.'"