Home > Finance, Investment Ideas > Imax’ed Out into Earnings

Imax’ed Out into Earnings

So apparently the pre-earnings runup in Imax (IMAX) shares left investors content to sell the news.  Often times strong stocks sell off on great news…the whole “buy the rumor sell the news” phenomenon. I watch this stock closely on a daily basis and witnessed some weird action over the past two days. Yesterday upon the news that Warner Brothers would produce 20 films in Imax 3-d, the stock instantly popped $1 and then sold off to new intraday lows.  It seemed as though someone wanted to lock in gains pre-earnings.  Premarket today the stock traded up to $21.60 and then sold off all the way to $18.50.  Clearly someone wanted out even after earnings.  These are incredibly volatile moves for a ~$20 stock; however, they make sense considering the stock is up over 200% from its 52-week lows.  Between the Warner Brothers news yesterday and the earnings report this morning, a significant portion of my original thesis is starting to come to fruition and the momentum behind 3-d entertainment, particularly Imax, continues to snowball.  I have yet to write out my thesis with regard to Imax on AZ (but you can check out one of my early long Imax calls from the T3Live Blog) and think that today would be an excellent opportunity to run through some of the key points.

When Imax broke out from the $12.50 level on the monthly chart back in December, the stock reached levels not seen since 2000, just as the tech bubble was in the midst of collapsing.  A breakout of this magnitude is generally the sign that a transformational shift is playing out in the fundamentals of the company and with Imax, that shift was vividly clear.  Avatar was a spectacular spark for this once struggling company.   A little over a year ago I went to see Beowulf in Imax 3-d and could not believe how thoroughly enjoying the experience was for such a terrible movie.  From the moment the first preview for a 3-d U2 concert brought Bono into the middle of the audience, I felt an exhilarating rush.  I am not a movie-going person for the most part, having gone to maybe two movies in the past three years; however Imax completely changed my perspective on in theater entertainment.

I had avoided movies in theater because I have a pretty good sound system with a high definition tv.  To pay $12 to see a movie when I could just wait an extra month, tap into my Netflix account, and have a very similar experience to the theater on my own couch for a fraction of the cost did not give me enough incentive to rush to the movies.  Additionally, movies themselves of late had seemed stale, with recycled plots and canned special effects.  3-d offered something totally different.  For just $2 more than a regular movie and about $50 less than even a shitty ticket to a sporting event, I was able to experience a public form of entertainment that offered great value compared to the spectrum of available options.  Not only was it great value, but it was something unique, exciting and totally new.  I was instantly hooked.

As for the company itself, pre-Avatar the financials were rather crummy.  Imax was loaded with debt, had little cash and suffered from negative earnings.  I believe that we are in a rolling credit crisis, in which cash is king and debt markets remain fragile, and as a result, I conscientiously avoided companies with high debt and weak cash positions.  However, with Imax I took a different stance.  The fundamental catalyst that Avatar provided in changing the game altogether sparked a balance sheet transition in which this earnings release highlights tremendously: the company went from a total of $161.2 million in debt at the end of 1Q 2009 to a mere $16.5 million at the end of 1Q 2010.  This greatly enhances the companies profit margins, cheapens their cost of capital, and provides a catalyst in and of itself for an increased stock price.

Moving forward, Imax continues to expand its theater presence both in the U.S. and abroad, while maintaining a stable cost structure.  Profit margins continue to improve and the uptake of 3-d technology is accelerating exponentially.  With Warner Brothers signing on to release 20 movies through Imax, Imax has both ensured that another major studio release films through Imax (Disney and Dreamworks are committed as well) and allayed investor fears that Imax may not be the “only” option when it comes to producing 3-d movies.  This should help cement the brand-line as synonymous with 3-d entertainment (my generation thus far uses the name Imax and the technology 3-d interchangeably, much the same way Vaseline is petroleum jelly), and to help promote further buildout of Imax’s theater presence.

Furthermore, with more studios on board, directors and producers will begin tailoring their movies to the 3-d experience.  Avatar was the first such movie that was made with 3-d in mind and both the plot-line and theme perfectly fit into the totality of the experience.  3-d is an entertainment form that brings fantasy to real life.  I can imagine that it is not nearly as thrilling to watch a biopic in 3-d, as it is to see a fantasy or mythical movie where the characters come to life.  Warner Brothers signing on with Imax demonstrates a commitment from the major studios to tailoring their script writing and production to new entertainment.  Just as I was typing this, a trader nearby boasted about how he “cannot &%*($*# wait to see Iron Man in 3-d!!!”

Although today we are seeing a sharp pullback in the company’s stock, it held it’s 20-day moving average with volume on its first test and prominent analysts already have defended the share’s stock price.  I view this as some profit taking from investors who have enjoyed a tremendous ride year-to-date.  While the economy has improved (as evidenced by the stock market, etc) the lot of the average American has yet to respond.  During the Great Depression, there was a boom in new forms of entertainment.  Baseball cemented itself as America’s past-time and Hollywood emerged as an entertainment mecca.  I believe 3-d holds the potential to once again fundamentally alter how we Americans consume entertainment, much the same way I believe Netflix will play an increasingly more important role moving forward.

Disclosure: I am long Imax.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: