A Big Screen Roller Coaster Ride

12/07/2009 12:00 pm EST

Focus: STOCKS

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says IMAX has had as many thrills and chills as its big-screen movies, but big growth is in sight.

Since IMAX’s (Nasdaq: IMAX) initial public offering in 1994, the company’s shareholders have been on a roller coaster ride. Shares of the Canadian pioneer of giant screen film technology surged as high as $32 in late 1998, only to plunge as low as $1 in 2002. After hitting nearly $11 in 2006, shares dropped below $3 earlier this year. (They closed around $11 Friday—Editor.) It makes you queasy just looking at the chart.

Unlike some companies with a volatile history, IMAX’s product has rarely been the problem. Since 1967, the company has been on the cutting edge of film technology. Most folks would agree that seeing an IMAX film is a better overall experience than a plain old movie.

Surveys show that most filmgoers are willing to pay a hefty premium above normal movie ticket prices to see an IMAX show. IMAX’s main competition is going to a regular flick or finding another way to entertain one’s self. Nobody else offers quite the same giant-screen experience with unique content produced exclusively for IMAX viewing.

So, with a great product and little competition, what explains the choppiness in the stock price? One reason is that IMAX has struggled to develop a business model that is as impressive as its movie experience. It looks like they may have finally gotten the right formula with a new revenue-sharing model with theaters.

Rather than buying gear from IMAX, theaters essentially lease it and split the revenue with IMAX and the studios. All parties involved therefore have a strong incentive to make it work. As the base of theaters with IMAX screens grows, so does the availability of content. Eventually it becomes a virtuous growth cycle.

The new model appears to be helping the bottom line. In the nine months ended September 30th, IMAX reported a 54% jump in revenue compared with the same period a year ago. On an operating basis, income was $13.3 million, versus a loss of $10.9 million last year. Net income was just barely in the black, with a two cent per share profit. Analysts expect substantially better profitability as IMAX’s new business model gains momentum.

It’s worth noting that the advent of digital technology has also helped to boost the adoption rate. Prior to 2005, IMAX used to sign up about 30 new theaters a year. Recently it’s been closer to 100 theaters per year.

Median analyst forecasts call for IMAX to earn 45 cents per share in 2010 and 64 cents in 2011. That works out to about 23x next year’s estimate and 16x the 2011 number. Those are quite reasonable multiples for a company that is on track to deliver 40%+ growth, assuming forecasts are on target.

IMAX’s share price is likely to remain volatile. But if IMAX continues to execute well, it has a very good chance to become a “must-own” global entertainment stock.

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