Fabrice Taylor, Chartered Financial Analyst, is a principal in Capital Ideas Research and writes the blog fabricetaylor.com
Imax Corp. may have sexy high technology but the investment story sounds like a broken phonograph.
The stock is on another perennial tear right now, this time because Imax theatres earned $15-million (U.S.) from Alice in Wonderland. Avatar also did well. Amazing things happen when you can use Hollywood names in your news releases.
But while the stock - which hit a 52-week high of $16.10 (Canadian) yesterday - is doing well now and looks tempting, history suggests, at least to me, that the bullishness is not sustainable.
Those with long memories are well acquainted with the Imax cycle. Every few years something happens that leads analysts and some investors to say the company's time has come.
A few years ago the pitch was that home entertainment systems were getting so good, with DVDs, high-definition, flat-panel screens and digital projectors, that movie exhibitors (that is, theatre owners) would have no choice but to bulk up on Imax to draw crowds. That didn't happen, although it was enough to get the stock to about $13 before reality set in and investors found themselves face down in that greasy stuff they make the popcorn with. The stock later doubled on more promise before getting cut in half. Now it's surging again, but I don't think the outcome of this sequel will be any different.
The marketing of the plot line is better than ever, though. Imax has certainly transformed itself in recent years. The company's old business model didn't work very well. Imax had a reasonably large installed base of theatres and systems but it couldn't make money consistently. Printing film is expensive for normal sized screens and massively more so for Imax, meaning the film had to have a long run in theatres for the exhibitor to make any money. Few were willing to take the chance. Most of the Imax systems were installed in museums, planetariums and the like.
Then the company figured out how to convert films to digital for display in its systems. That cut down the costs of distribution and generally made the Imax format more appealing. The return of 3-D helps a lot, too.
For several years before and during this transformation the company survived despite losses and negative book value. A couple of big equity financings and a return to modest profitability solved that problem.
The upshot is that the balance sheet is much stronger, the installed base is growing well (403 theatres as of the third quarter of last year, up 25 per cent from a year earlier), and the buzz is thick in the air.
Which brings us back to the stock price. It has more than doubled in a year. It's higher than it has ever been if you ignore the follies of the tech bubble. Compared with its profitability, it's enormous. And it will most likely go higher, maybe a lot higher. So traders might prosper. But my guess is that long-term it's not going to make investors any more money than they've made in the past decade.
As mentioned, every few years the boosters offer up another reason you have to own the stock, and it works: The stock goes up. Insiders do well on their options, traders who buy low and sell high earn bragging rights, but real believers turn into pouters.
True, Imax has some interesting revenue-sharing agreements with studios and exhibitors. True, attendance at its shows has been high.
But the box office is a fickle thing. It's hot, and just as quickly it's cold. Are movie-goers putting on their coats to go see an Imax 3-D movie or are they going out to see Avatar and Alice in Wonderland because they're good shows?
To illustrate the point, Imax stock did well in 2008 on the back of The Dark Knight. The latest available year-over-year comparison shows a big drop in Imax box office in 2009.
Hollywood is not a big growth story; it's a very flashy, very lumpy business that investors generally don't thrive in.
There's another reason for skepticism, if that's not enough: competition. The Imax large screen format may be unique but it's not without substitutes. In fact, AMC, a joint venture partner of Imax, is installing something called ETX theatre in some cinemas. ETX has a bigger screen, 3-D and enhanced sound. Imax 3-D may be better (or not) but consumers apparently don't absolutely have to have it, meaning competition is big and - if 3-D is more than a fad this time around - growing.
It's a rare sequel that is better than the original but in the case of the buzz around Imax, it's true. But unless you think you can flip the shares in short order, get your thrills in the theatres, not the stock market.
More screens, more money?
NUMBER OF THEATRES
'04 / 248
'06 / 284
'08 / 351
'09* / 403
REVENUES $U.S. MILLIONS
'04 / $132.3
'06 / $127.7
'08 / $106.2
'09* / $117.7
* 2009 figure for nine months
THE GLOBE AND MAIL / SOURCE: COMPANY REPORTS