I’ve said it before, and I’ll say it again: I love the gigantic screens and sound systems provided by IMAX Corp (USA) (NYSE:IMAX). However, IMAX Corporation has never made very much money in any given year, and yet the market continues to reward it with a valuation that it will never earn enough money to justify.
IMAX loves to tout how many new IMAX screens it is putting in someplace, partnerships with movie chains, and upgrades to its system. And it loves to tout how many IMAX screens it has installed around the world. Nevertheless, the business model is such that it has not, and never can, make very much money.
IMAX generates income by installing systems and upgrading and repairing systems, and it generates some revenue via revenue-sharing agreements on certain screens in certain locations. IMAX bulls have been crowing for 10 years that these revenue-sharing agreements will bring in tons and tons of money.
But in the ensuing 10 years, which has included several billion-dollar blockbusters from Avatar to the Star Wars films, to any number of Marvel films, these revenue-sharing agreements never amount to very much.
In its first quarter earnings report, the revenue-sharing agreements generated $17.9 million. Granted, the first quarter doesn’t have any gigantic blockbusters, but if you look at quarters in which there have been massive blockbusters, revenue sharing simply doesn’t live up to its promise.
Network business revenues grew about 14% to $44.9 million. That sounds great, especially with gross margins at 70%, but it doesn’t feed very much to the bottom line.
So even though total revenue for the quarter hit $85 million, up from $68.6 million, and gross margin grew to $50.7 million from $35.7 million, by the time you hit operating income, it comes down to $16.7 million. That certainly was an improvement over the $500,000 loss in the year before.
Bottom Line on IMAX Stock
Over time, the market seems to have figured this out. IMAX stock peaked at $43 in June 2015, and it never saw that price again. After bouncing around in the $30 range for some time, after hitting $34 last March, IMAX stock fell down to $18 a share in August.
Since then it has bounced around in a trading range. The question is when does the market wake up again and take the stock down to where it belongs? There’s nothing special about this company’s operations. IMAX doesn’t generate heaps of free cash flow, so there’s no dividend to be paid and no private equity venture that would be excited about buying it out.
I certainly don’t see any reason, after all these years of exciting new upgrades and a revenue-sharing business model that never amounts to much, that IMAX stock will suddenly find any reason to go much higher.
The one saving grace for IMAX stock, one that might ultimately justify its current valuation, is if some third party comes in to buy it out. There’s been a great deal of consolidation in the movie theater sector.
Nor would I count on it.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.