Imax's Golden Ticket

In the summer of discontent at the movies, one bright spot comes from Imax Corp.

In this summer of discontent at the movies, one bright spot has come from Mississauga, Ont.-based Imax Corp. Industry box office for the year is down about 10% over 2004–a decline fuelled, perhaps, by people watching DVDs on plasma TVs from the comfort of their couches. But Imax (TSX:IMX), with 259 screens in 36 countries, is enticing fans to its 2-D and 3-D versions of commercial releases. That has grabbed the attention of analysts and investors who think its systems–with screens up to 100 feet wide and eight storeys tall–offer a big enough difference to get viewers out of the den and into the multiplex. Imax creates an experience that “simply cannot be duplicated at home,” wrote Thomas Forte, a stock analyst with Morningstar, after the August release of second-quarter results that saw earnings of US$1.1 million (3¢ a share) on revenue of US$30.9 million. “We believe [it] is poised to succeed.”

When the theatrical biz weakened in the late '90s–12 U.S. chains declared bankruptcy since 1999–once-high-flying Imax stock got clobbered, falling to as low as 55¢US in September 2001. (The company lost US$145 million that year.) Now the stock trades at about US$10. Along the road to recovery came the 2003 launch of Imax DMX technology, which lets theatre operators who install it recoup their investment in only three years, provided each screen generates US$1 million in annual box-office receipts. The company also began offering Imax DMR, which cost-effectively converts Hollywood-standard 35-mm film to 70-mm format, paving the way for Imax versions of big-budget releases.

Imax DMR hit its stride this year, with the release of a Batman sequel, Robots, Charlie and Chocolate Factory and The Polar Express. Imax theatres earned about US$700,000 a screen between January and August, and co-CEO Richard Gelfond suggested in a second-quarter conference call the average will reach the US$1-million milestone this year. Imax moviegoers, he said, seem willing to pay a 30% to 40% premium over conventional flicks. In the last half of June, box office was down 20% from a year earlier, but revenue was up 45% at Imax theatres.

There are those who remain bearish on the stock. Some feel that “no matter how great the experience, a bomb at the box office can still affect Imax,” Forte says. If the economy weakens, Imax's theatre customers may cut back on installations. Others wonder if the stock is too expensive. It's trading at about 26 times forecast net earnings for fiscal 2006. Forte says it is “fairly valued” at US$9; Katherine Dalton, an analyst at Merrill Lynch in Toronto, has a neutral rating and target price of US$11.35; she forecasts EBITDA for 2006 of US$51 million. “While Imax has demonstrated strong momentum,” she wrote in a July report, “much of this positive news is being reflected in the valuation.”

Still, Peter Siris of New York-based Guerilla Capital Management, a longtime Imax shareholder, says the company has put the magic back into movie theatres. It can take films like The Polar Express–a modest success in conventional release, but a hit in Imax 3-D–and turn them into box-office gold. “What Imax has done,” he says, “is create something unique and special.” If it can continue to do so, its stock could have real star potential.