Don’t Get Caught Up in the Hype

Imax (IMAX), which operates giant screened movie theatres as well as licenses the technologies to third parties, reported an outstanding fiscal fourth quarter 2009 on Thursday morning. The company benefited from the blockbuster success of Avatar, which is arguably one of the most visually appealing movies ever made. The high screen quality as well as the ability to show 3D films was a key reason for Imax’s surging revenue in the quarter. To date, Avatar on its own has been responsible for $218 million in box office revenue at IMAX theatres. In the recent quarter, sales rose 98% to $54.2 million and easily topped analysts’ estimates of $45.3 million. Earnings came in at $.20 per share easily topping the analysts’ view of 6 cents due to the greatly increased traffic due to feature films like Avatar.

In addition to Avatar, IMAX appears to have another huge blockbuster on its hands as just last week Alice in Wonderland shattered previous IMAX opening weekend sales totals. Globally, IMAX sold $15.2 mln in tickets with nearly 80% of that from US theatre locations. The success of the movie’s opening weekend sent IMAX shares more than 18% higher in three trading days coming into the earnings report. Furthermore, the company said that box office sales to date this year have been $187 mln, blowing away the results from a year ago at this point of only $14 mln. It is clear that IMAX is really hitting its stride and growth should continue through the next few months with new installments in the successful movie franchises of Iron Man, Shrek, and the Twilight series.

The stock is riding high on its awesome recent performance and currently sits at its highest point since late in the year 2000. However, some analysts warn that IMAX may face increased headwinds in second half of this year. There is expected to be a lull in potential IMAX blockbusters, and other theatres are quickly starting to adopt 3D capabilities while not charging the premium IMAX ticket price. More theatres offering 3D movies would surely cut down IMAX’s market share. Furthermore, movie studios may start to clamp down on IMAX as they make a better cut from sales at regular theatres.

It is clear that IMAX has performed admirably in the past quarter and should continue to see sales growth into the next few quarters, but as far as valuation is concerned, we would not recommend buying at this price level. The success at the box office for Avatar has been widely publicized and it may prove to be a ground breaking film that encourages the use of 3D even more often. However, when looking at the company’s historical price-to-sales metric versus the year just ended (heavily influenced by Avatar) it is clear that the market has priced in much of this growth. Over the last ten years IMAX has traded for 1.3x to 3.7x sales per share. In the year just ended the metric has ballooned to 5.9x sales per share. In terms of price-to-cash earnings per share, the stock has just narrowly returned to profitability in the last year, and while the prospect for earnings growth looks almost certain, the forward looking P/E ratio is not a bargain at over 26x.

Based on our valuation, we would recommend investors not get caught up in the hype over IMAX’s recent performance, and we are maintaining our Overvalued rating. The company is finally starting to improve fundamentally and strengthen their historically shaky balance sheet, but the market has already awarded the stock with a 277% gain in the last twelve months.

IMAX’s Valuation is in Fantasy Land

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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