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Coverage Initiation: IMAX Corporation
IMAX Corporation (IMAX), a leading entertainment technology company, primarily designs, manufactures, and sells premium digital theater systems. As of March 31, 2011 the IMAX theater network consisted of 528 theaters (408 commercial, 120 institutional) in 46 countries. In addition, the company has expanded its product portfolio over its 43-year history, and now operates in multiple facets of the entertainment industry, competing with the likes of 3D technology firm RealD Incorporated (RLD).
The company has eight reporting segments: IMAX systems, theater system maintenance, joint revenue sharing arrangements, film production and IMAX DMR, film distribution, film post-production, theater operations, and other. The company’s largest customers include theater exhibitors, such as Regal Entertainment Group (RGC), and Cinemark Holdings (CNK), as well as museums and science centers.
In 2010, IMAX achieved record revenues of $248.6 million. IMAX systems and Film operations are the company’s bread and butter, accounting for approximately 31% and 36% of the top line in 2010, respectively. In addition, joint revenue sharing arrangements generated nearly 17% of total revenues in 2010, while the remaining segments contributed the balance.
The company’s stock debuted in 1994 at around $5 a share, and then rode the tech bubble up to almost $30 through the late 1990s before crashing to $0.50 a share in 2001. For the better part of the last decade, IMAX traded between $5 and $15 a share. Investors took notice in 2009 as the company bounced back from the recession, bidding the stock to new highs in 2011.
Going forward, shares of IMAX will probably continue to be an intriguing growth story fueled by expansion domestically and overseas. As of March 31, 2011, about 65% of IMAX theaters were in North America. This market should continue to generate revenue growth from both theater expansion and box-office related sources.
Despite the listless economy, quite a few cinema operators are pursuing a premiumization strategy. By upgrading theaters, motion picture exhibitors can increase ticket prices for movies shown in IMAX and 3D formats. Additionally, Hollywood has increased production of films in IMAX and 3D media. However, once the current wave of capital expansion winds down, sales of screen and projection equipment will probably moderate.
Indeed, the allure of emerging markets appears to foretell a happy ending to the IMAX story. As incomes in developing economies rise, the demand for leisure activities should also increase, which will likely support higher consumption of movies and benefit the company. In March, IMAX inked a joint revenue sharing agreement with Wanda Cinema Line, the largest theater operator in China. Also, the company has a deal with PVR Cinemas, which is a leading theater operator in India. In June, IMAX expanded its footprint in Russia, as well, with an agreement to open theaters with Kinomax and MORI Cinema.
On the other hand, there are some caveats. Like box office success, IMAX’s share earnings are volatile and unpredictable. Even though IMAX has created a distinct experience, competition from digital video services including Netflix (NFLX), Amazon (AMZN), and Apple’s (APPL) ITunes will probably intensify over the coming 3 to 5 years, which may well hurt-film related revenues.
All told, a solid backlog and favorable macroeconomic trends will likely support healthy advances in both revenues and earnings per share for years to come. Investors practicing a growth-oriented strategy should consider shares of IMAX.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.