Expecting 70%+ with IMAX by 2026

📈 Trade Details

Considering a straight stock purchase of IMAX at $20.55 (the price at the time of writing). 

🎯 Expected Return?

If the expected earnings growth materializes, the expected return is 71.89% by 2026 or 28.30% annualized. This gives us a solid margin of safety to work with.

🗒️ Quick Company Summary

NYSE Ticker: IMAX

MAX Corporation is a global leader in the entertainment technology industry, primarily known for its high-resolution film formats and large-screen cinema systems. The company designs and manufactures IMAX theatres, which provide an immersive movie-going experience through advanced projection and sound technologies. 

The company generates revenue through several key channels:

1. Theater Systems Sales: IMAX sells its proprietary theatre systems to cinema operators, which includes the installation of large-format screens and advanced projection and sound technology.

2. Film Production and Distribution: The company collaborates with major film studios to produce and distribute films specifically formatted for IMAX theatres, often sharing in the box office revenue.

3. Licensing Fees: IMAX collects licensing fees from theatres that operate IMAX systems, which can include a percentage of ticket sales.

4. Merchandising and Other Revenues: Additional income may come from merchandise sales and other related services.

🎯 What analysts think (Stock Price Forecast in 1 YR):

Avg. Price: $25.27 (+22.97%)
Lowest Price: $16 (-22%)

Historically, the stock has traded below analyst targets, but the company consistently beats analyst expectations:

🎯 What do financial models think:

Avg. Price: 21.02 (+2.3%)

Breakdown by Model:

• 10Y DCF EBITDA Exit: $21.96 (11.90%)

• 10Y DCF Revenue Exit: $24.93 (0%)

• 5Y DCF Growth Exit: $18.95 (23.98%)

• 5Y DCF Revenue Exit: $22.46 (9.91%)

• 5Y DCF EBITDA Exit: $17.81 (28.57%)

• 10Y DCF Growth Exit: $20.03 (19.63%)

🕰️ Historical Performance vs. S&P500 ($10k Investment)

Here is the summary of your returns if you invested $10,000 in IMAX vs. S&P 500 since 2021. 

IMAX had a really tough time during COVID. The pandemic severely affected movie theaters worldwide, leading to temporary closures and reduced capacity limits. This resulted in significantly lower attendance and revenue for IMAX theaters.

Pair that with major film studio delays, which are crucial for driving ticket sales in IMAX theaters. The lack of new content limited audience engagement and revenue generation.

IMAX faced increased costs related to health and safety protocols, including sanitation and social distancing measures, which added financial strain during a period of reduced revenue.

The company had existing debt obligations that continued to impact its financial health, particularly during a time when revenues were significantly lower than pre-pandemic levels.

🔮 Future Earnings Expectations

Analysts expect earnings to pick up over the next 4 quarters, especially in 2025.

🚚 Key Drivers of Future Growth

1. Strong Box Office Recovery:

   • IMAX reported a robust recovery in box office performance, with significant contributions from films like Inside Out 2, Twisters, and upcoming titles such as Deadpool & Wolverine. The management emphasized that the box office slate for 2025 and 2026 looks particularly strong, with numerous films shot using IMAX cameras.

2. Increased System Installations:

   • The company has raised its installation guidance for 2024, expecting to install between 130 to 150 new or upgraded systems, up from the previous guidance of 120 to 150. This reflects a growing demand for IMAX systems globally, with 39 installations completed in the first half of 2024, a 34% increase year-over-year.

3. Diverse Content Portfolio:

   • IMAX is diversifying its content beyond traditional Hollywood blockbusters. The success of the documentary The Blue Angels and partnerships for alternative content, such as live events and concerts, is expected to drive additional revenue streams.

4. Strategic Partnerships:

   • The company has secured significant agreements with key partners, including a landmark deal with Wanda Film in China, which is expected to enhance IMAX's market presence and content offerings in the region.

5. Emerging Revenue Streams:

   • IMAX is focusing on new revenue opportunities, including streaming rights for documentaries and alternative content events. The management noted that these emerging revenue streams are contributing positively to the overall financial performance.

6. Operational Efficiency Improvements:

   • Management highlighted ongoing efforts to streamline operations and improve tax efficiency, which are expected to enhance profitability and cash flow in the future.

7. Growing Global Network:

   • IMAX's global network is still underpenetrated, with less than 50% estimated market penetration. The management believes there is significant room for growth in various international markets, particularly in Asia and Europe.

🐂 Key Bullish Arguments

1. International Market Growth Potential:

   • IMAX Corporation has significant growth opportunities in international markets, where the penetration rate of IMAX theaters is currently lower than in the U.S. This underpenetration suggests a long runway for expansion, with the potential to double the number of theaters in these markets.

2. Revenue Growth from Alternative Content:

   • The company is expected to enhance its profit margins through increased revenue from alternative content, such as live events and local language films. This diversification can improve overall capacity utilization rates in theaters, leading to higher profitability.

3. Attractive Valuation:

   • IMAX's stock is trading at a Price-to-Earnings Growth (PEG) ratio below 1, indicating that it is undervalued relative to its financial improvement potential. This suggests that the market has not fully recognized the company's growth and margin expansion opportunities.

4. Strong Revenue Growth:

   • IMAX reported a 24.6% increase in total revenue for FY 2023, with significant contributions from international markets. The revenue from non-U.S. markets grew by 33.1%, highlighting the company's strong performance and potential for future growth.

5. Potential for Increased Box Office Share:

   • IMAX's box office share in international markets is significantly lower than in the U.S. (2.2% vs. 5.2%). As the company expands its theater network and increases its focus on local language films, it is reasonable to expect that this gap will narrow, further driving revenue growth.

6. Positive Operating Leverage:

   • Increased screenings of alternative content can lead to higher capacity utilization rates, which will translate into high-margin revenue streams. The average capacity utilization for IMAX theaters is currently around 20% on weekends, indicating room for improvement.

7. Projected Margin Expansion:

   • Analysts project that IMAX's normalized net margin could rise from 14% in FY 2023 to 21% by FY 2027, driven by increased revenue from alternative content. This anticipated margin expansion supports a bullish outlook on the company's profitability.

8. Long-Term Earnings Growth:

   • The expected earnings compound annual growth rate (CAGR) of +19% from FY 2023 to FY 2027 reflects strong financial improvement potential, driven by both revenue growth and margin expansion.

🐻 Key Bearish Arguments

1. Dependence on the Movie Theater Market:

   • IMAX's revenues are heavily reliant on movie theatre attendance, which poses a risk as digital streaming platforms continue to gain market share. Although IMAX offers an immersive experience, it still faces competition from platforms like Netflix and Disney+.

2. Operating Margin Concerns:

   • IMAX's current operating margin of 12.1% is significantly lower than the pre-pandemic level of 20.1%. This suggests that the company may struggle to return to previous profitability levels.

3. Market Valuation:

   • The stock is believed to already price in good growth prospects, which diminishes the attractiveness of the investment opportunity.

4. Cautious Revenue Projections:

   • Future revenue growth is projected conservatively. This modest growth rate reflects ongoing concerns about the company's ability to expand significantly.

5. Minority Interests Impact:

   • Approximately 22% of IMAX's equity is in minority interests, which could negatively affect cash flow conversion and overall financial performance.

6. Potential for Slower Installation Growth:

   • Although recent signings have improved the installation backlog, there is a risk that the pace of new installations may not meet expectations, which could hinder revenue growth.

Conclusion

IMAX is a capital-intensive business that requires solid operations to finance its growth. Some of it is financed by debt that posed a number of challenges during the pandemic. Revenues dropped while debt still had to be serviced. Earnings took a hit, but 2023 was a year of recovery, and we are back to profitability. There are lots of opportunities to expand operations in international markets as the company has a clear tech advantage, a very strong brand and a superior product. 

Disclaimer
I currently do not have an active position in any of the companies mentioned above, but I am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy