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3 Reasons to Pass on IMAX

IMAX stock has a solid balance sheet, but lacks both long- and short-term catalysts.

IMAX Corporation (NYSE:IMAX) has found itself in a tough spot. Because movie theaters are feeling the pinch from the novel coronavirus, IMAX stock is struggling to gain upside momentum. 

Source: Sundry Photography / Shutterstock.com

Surprisingly, the stock is doing better than I would have suspected. To be fair, most stocks are doing better than I would have expected given the economic ramifications of Covid-19. 

Eventually though, movie theaters will be “back to normal” and IMAX stock will get past the current situation. It has the balance sheet and cash to weather the current storm. But surviving doesn’t equate to thriving, and the latter is what we’re looking for. 

No Growth

Immediately, investors’ attention shifts to current estimates. In this case, consensus expectations call for revenue to sink 57% this year to $167.25 million. For earnings, estimates call for a breathtaking 200% decline, to a loss of $1.04 per share. 

But even before Covid-19 swept across the world – and then lingered here in the U.S. – IMAX had its problems with growth. Check out the prior four fiscal years of revenue, starting with 2016: $377.3 million, $380.7 million, $374.4 million and $395.6 million. 

That last year, fiscal 2019, was a solid bump from the prior year. By and large though, it’s a pretty unimpressive streak. Toss the Covid-19 situation in and who knows how long it will take to claw back out of this trough. 

Analysts estimate a 105% rebound in revenue in 2021, up to $344 million. That number might be conservative if we get Covid-19 under control. It may very well be aggressive though, if the number of Covid-19 cases fails to sink and movie theaters – either by government mandates or by public choice – cannot operate with any sort of meaningful capacity.

Pressure Remains on Studio Industry

Here’s the problem. Stocks like Amazon (NASDAQ:AMZN) and Costco Wholesale (NASDAQ:COST) are flying to new highs. Even though both companies are experiencing rising costs and disruptions associated with Covid-19, demand for the businesses are strong. Even though short-term profit is suffering, sales are booming and investors know that sows a better customer relationship.

For IMAX, mall operators and others, that’s not the case. They are burning cash as they focus on ways to survive until this viral storm relents. 

AMC Entertainment (NYSE:AMC) again delayed its reopening, as the film industry remains fractured. Disney (NYSE:DIS) delayed “Mulan” for the fourth time, while AT&T’s (NYSE:T) Warner Bros. just delayed “Tenet.” This is happening across the board. 

The studio unit for Disney, Warner and others are getting hammered right now. They don’t want to debut what should be blockbuster hits to a lackluster movie market. One option would be to release films overseas in countries with a better handle on Covid-19, then slate a later release in the U.S.

This is a potential strategy, but it may be able to help both the studios and IMAX. More than 70% of its locations are in international markets. Either way, there are a lot of “ifs” with theaters and potential releases at this moment. 

IMAX Stock Charts Are Discouraging

Daily chart of IMAX stock price.
Click to Enlarge
Source: Chart courtesy of StockCharts.com

We have a lack of studio urgency weighing on short-term sales, while IMAX was never a big growth machine in the first place. Because of both scenarios, there is little urgency for buyers to step in. That’s showing itself on the charts. 

Why would one rush to buy a company with no short-term catalysts, particularly when it doesn’t have many long-term catalysts? 

IMAX stock fell more than 70% from its 2020 high to its March low. However, that high was in play at just $21. That’s more than 50% below its 2015 high, as shares have suffered through a multi-year downtrend. 

Shares have doubled from that low though, as IMAX assured investors it had the liquidity to make it through. Still, falling 70% from the high then doubling leaves shares down 41%. In other words, IMAX stock is a laggard. 

The short-term chart improves if IMAX stock can maintain above the 20-day and 50-day moving averages. Below puts $10.50 in play. Above keeps $14.25 on the table, followed by a potential test of the 200-day moving average. 

Keep in mind, coronavirus cases and any potential lockdown news will likely influence the stock — both for the good and the bad. 

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long DIS and T.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/3-reasons-to-pass-on-imax/.

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