Big Screen Dream

You never know which films might be a hit which makes investing in studios a high risk venture. But there are several very clear trends in the way we consume moving pictures that sets up an interesting investment opportunity.

Generally speaking, the movie theater business faces the challenge of flat to even lower attendance as improved home systems, quicker time to streaming or DVD releases and compelling programming from Netflix (NFLX), HBO and even YouTube. But people still want some of that big screen experience especially when it comes to seeing large scale “event” movies. And studios are increasingly building their business model, budgets and release schedule around these “tentpole” franchises. This ranges from on big screens and are willing to pay more for the special formats such as surround or 3-D or the IMAX specializes in.

I’m looking at bullish position in IMAX (IMAX), the maker of wide and surround theaters.

The company operates 1,061 IMAX theaters systems, including 943 commercial multiplexes, 19 commercial destinations, and 99 institutions in 67 countries.

The main thing supporting total film industry sales figures are blockbusters and higher average ticket prices. These two item play right into IMAX’s strength. People still want big screen and communal experience for special effects and event type movies such Star Wars. IMAX has been grabbing an increasingly larger slice of the pie. For Batman vs Superman it grabbed over 55% or $39 million of the opening weekend’s receipts some over the film’s opening. The fact the movie is already one of the top grossing despite terrible reviews speaks to the draw of the large screen format.

Displaying movies at IMAX theaters has become an essential part of studio’s tentpole business model. Nearly all of the upcoming big-budget movies will have IMAX versions including obvious one such as X-Men but also less obvious such as a Dora the Explorer sequel.

Most IMAX the theaters are located within multiplexes in which it has revenue sharing deals such as traditional theaters run by Regal, AMC or Cinemark. As it becomes something of the “anchor” tenant for these chains it can command a higher percentage of the profits.

IMAX also has a visible growth plans with much of it coming overseas. The company plans to add another 180 screens in 2016, has agreements to upgrade 280 screens and has a backlog of orders for another 350 screens worldwide.

Last year the company spun out IMAX China, of which is still owns 68% to monetize the growth without taking on much of the economic risk or capital outlay. It has a contract to install its technology in over 100 screens during 2016 in which it gets paid a flat fee and then can reap upside revenue sharing.

It also recently signed a deal with INOX Leisure Limited the largest exhibition chains in India, to open five IMAX theatres. India, with it’s renowned “Bollywood” industry has a strong demand and consumers that have shown a willingness to pay a premium for a superior movie going experience. This agreement represents the largest theatre deal for IMAX in India and brings the total number of IMAX theatres in the country to 20, with nine currently open and 11 contracted to open.

IMAX has also pushing into theme parks and other tourist destinations such as science and educational facilities and cultural centers such as museums. It is even teaming with companies such as Harmon (HAR) for installing high end private home theaters.

When the company reported fourth quarter earnings on February 25 it showed top line revenues of $119.33 million, a 16% increase over the year ago period and beat analyst estimates. But the bottom line earnings per share came in at $0.39 per share which was below the $0.43 estimate. The shortfall caused shares to tumble some 65 that day.

The company also announced a $90 million increase to its stock buyback program. The fact that it only initiated the buybacks in 2014 and it is still capital intensive expansion period speaks to the company’s comfort with its cash flow and profitability and that it thinks its shares ate $30 are cheap. Many on Wall Street disagree and think the current 35x p/e makes the stock a bit rich. I think given its expected growth the multiple is justified.

From a technical standpoint shares of IMAX had quickly recovered the post earnings sell-off and then started trending lower. The stock is now near support at $29 level which should offer a good risk/reward entry point.

IMAX Chart 4.16.15

The Trade:

I want to have a straightforward long term bullish bet. I’m targeting the purchase of the January $30 Calls which expire in 2017. This should cost about $3.80 per contract.

I think IMAX can make its way back to the old highs near $40 per share which would give the calls a minimum value of $10 or over 160% gain.

Photo: IMAX via photopin (license)

— Steve Smith

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About the Author: Steve Smith