IMAX: Revolutionizing the Theater Experience
Written for College Stock Picks.
“IMAX” is becoming a common household world in the U.S. and other areas of the world. After spectacular displays of Avatar 3D and other films in the past couple years that gained peoples interest, IMAX is emerging as a legitimate and profitable movie theater business that is revolutionizing how people watch movies in the theater. The company is valued at approximately $1 billion by the market, making it still a relatively small player in the digital and movie industry. I believe IMAX has a wealth of opportunity ahead of itself, the reasons of which I will explore below.
IMAX Corporation, which founded the motion picture format known as “IMAX”, officially began in 1967 and opened its first theater in 1970. The company is best known for its gigantic movie screens that average eight stories in height, 117.2 by 96.2 feet in dimension, totaling nearly 11,000 square feet in all. (Compare this to the typical movie screen size of about 70 by 30 feet.) Approximately a third of the company’s theaters fall into the “institutional” category, meaning the theaters are located in education-themed institutions (museums, parks, etc.). The rest of its theaters fit in the “commercial” category, which has featured commercial movies such as Dark Knight, Toy Story 3, and Avatar, among many others.
As of June 30, 2010, IMAX operated 325 commercial and 122 institutional theaters (totaling 447 theaters) in 47 countries around the world. This provides a stable international base of theaters for the company to build upon, and IMAX is rapidly expanding its “theater system signings” (meaning theaters that have been signed on to build). Through the first six months of 2010 IMAX signed contracts for 98 theater systems, nearly a 1000% increase from the 10 theater contracts the company signed in the first six months of 2009. To put it in perspective, the company signed more theater contracts in the second quarter of 2010 (57 contracts) than it did in the entire year of 2009 (35 contracts).
In July, IMAX CEO Richard Gelfond announced that management estimates the worldwide market potential for IMAX theaters to be closer to 1,250 than the previously expected 1,000. This expanded estimate represents approximately three times the amount of theaters the company currently operates; it’s safe to say that management is quite optimistic. A large portion of this growth is expected to take place in emerging markets such as China. In fact, on September 21, 2010 IMAX signed its largest Asia contract to build 15 new theaters in China. IMAX has a grand total of 96 theaters planned to be built in China, so you can see that this is becoming a major worldwide attraction.
Of course, any business can rapidly expand, the question is whether or not a business can expand in a sustainable and profitable manner. As can be common with many young and growing businesses, IMAX had its fair share of trouble during the middle part of this past decade. Between 2006 and 2008 the company reported net losses, negative cash flow production, and managed to accumulate $180 million in long-term debt. In an effort to cut costs and expand profits, during these years the company began transitioning to the digital format in existing and planned theaters, which played a big role in its return to profitability in 2009. By the end of 2009 all long-term debt had been paid off and the company remains free of long-term debt today. IMAX holds a total of $37.01 million in cash as well, more than it ever had between 2006 and 2008.
In the first two quarters of 2010 management paid off $20.15 million in short-term debt while the company generated $39.12 million in cash flow. During the same period IMAX earned $39.88 million in profits and $128.38 million in revenue. This represents a profit margin of 31.06%, a major improvement from the 2.09% profit margin in 2009.
Let’s remember that this is still a relatively small business that is rapidly expanding in many countries around the world. I find it highly impressive that the company is expanding at record levels, generating high levels of cash flow, and all long-term debt has been eliminated. The financials of IMAX are becoming rock solid in 2010, and if management continues at this pace the company will be in a strong global position for the long haul. Any business that can expand itself without loading itself in debt is a business worth noting.
What I find especially unique about IMAX is that it has opportunities both in North America and in the developing economies of the world. People of all backgrounds will enjoy a good movie experience, and IMAX has thus far proven to be the leader in providing breathtaking theater experiences with groundbreaking digital technology. A huge plus for the business is that there are no major competitors challenging IMAX’s market, which likely explains why the company has already rooted itself in 47 countries. As wealth in developing economies continues to increase, more people will find value in the special entertainment IMAX provides.
IMAX has an advantage over traditional theaters because it has more control over how it can market movies. People go to IMAX for “the IMAX experience” whether it be with a documentary or a 3D action flick. Smaller theaters can’t attract audiences in the same way. IMAX is doing to the theater industry what Netflix has done to the home entertainment sector: providing a name brand service that is so unique, recognizable, and well-managed that it will be extremely difficult for other businesses to compete. IMAX is creating its own niche in the theater business.
IMAX’s global shift and growing name has largely been a product of CEO Richard Gelfond, who bought IMAX in 1994 with Bradley Weschler (current IMAX Chairman). When Gelfond acquired the business, IMAX was only used in museums and not for commercial movies. When asked to see 2001: A Space Odyssey on an IMAX screen, Gelfond proclaimed, “We have to figure out a way to do that!”
Because digital technology is beginning to catch up to the ideas Gelfond has had since 1994, IMAX has been able to expand its commercial movie offerings with wonderful success. Gelfond has also headed up a major effort to slash costs; by 2005 IMAX developed a lower cost theater system that could be installed into an existing multiplex (rather than constructing a brand new multiplex), saving the company 70% in expenses. (Prior to this approximately $5 million was needed to build an IMAX theater, with the new system about $1.5 million.)
IMAX is transitioning from its status as a small business based only in certain movie markets to a global competitor changing the ways people see movies. Personally, Avatar presented in IMAX 3D tops my list of most memorable movie experiences. In the remainder of 2010 and 2011 IMAX will be showcasing Harry Potter, The Green Hornet, Pirates of the Caribbean 4, with a variety of many others. I see bright prospects for IMAX even in a shaky economic setting because it is led by a creative and inventive management team, has growing financial stability and opportunity, and the company is quickly picking up contracts to build new theaters around the world. With a reasonable P/E ratio of 25, I believe the stock is at reasonable levels for patient investors focused on the long-term prospects of this blooming business. It won’t be long before everyone is talking about “the IMAX experience.”David Kretzmann owns shares of IMAX.