2023-08-24 16:57:39 ET
Summary
- IMAX is capturing strong growth amid a recovery in the movie theater industry led by several high-profile blockbuster releases.
- The film "Oppenheimer" shot on IMAX cameras in the 70mm format has broken box office records and will likely lead to a record Q3 for the company.
- We are bullish on the stock which looks attractive following a recent round of volatility.
IMAX Corporation ( IMAX ) is known for its immersive film formats combining cutting-edge audio and vision technologies to create a unique movie theater experience. The company faced a challenging period during the pandemic where there were serious concerns about whether the entire industry would survive. The good news is that the ongoing recovery has defied expectations with recent Hollywood movie premiers breaking box office records.
Indeed, the company notes that the recent blockbuster success of "Oppenheimer", shot utilizing IMAX's specialty 70mm film format, has led to the company's highest-grossing month of July on record. The setup represents a tailwind for IMAX which is capturing strong growth with significant expansion opportunities worldwide.
We are bullish on IMAX with a belief that the current trends can drive earnings momentum going forward, supporting a positive outlook and catalyst for the stock.
IMAX Q2 Earnings Recap
IMAX last reported its Q2 results back on July 26 with a non-GAAP EPS of $0.26, beating the consensus by $0.11, and up from $0.07 in the period last year. Revenue of $98 million, climbed by 32% y/y and was also above estimates.
The bulk of the revenue reflects the core business model of charging independent movie theater operators and other venues a fee to utilize its audio-visual technology products and projection systems. This segment posted a 49% y/y revenue growth based on the rebound of box office-tied receipts and a higher number of installed locations globally.
The smaller content solutions side of IMAX cover fees for digital processing and post-production enhancements for studios saw a 6% revenue increase but benefited from a higher gross margin.
Firm-wide the gross margin at 59% ticked lower compared to 60% in Q2 2020 based on the shifting sales mix. Nevertheless, the bigger point is that the total adjusted EBITDA reached $32.8 million this quarter and is up 49% year to date compared to 2022.
source: company IR
Keep in mind that the results here cover the period through June 30 --before the release of Oppenheimer. For Q2, the movie releases that contributed to the top line included Hollywood titles lik e "Super Mario Brothers", "Guardians of the Galaxy Vol. 3", and "Spider-Man: Across the Spider-Verse".
By this measure, the expectation is for an even stronger second half of the summer movie season. IMAX is involved in the distribution of several high-profile titles like "Mission: Impossible - Dead Reckoning Part One" and the upcoming "Gran Turismo" which will be included in the Q3 results.
In terms of guidance , management sees a path for global box office receipts tied to IMAX reaching $1.1 billion, up 29% from 2022 flowing into higher revenues by the same amount.
What's interesting is that despite the exceptional recent box office data, the company maintained the same targets from Q1. Our interpretation is that management could be leaving room to exceed expectations when the company next reports.
source: company IR
What's Next for IMAX?
What we like about IMAX is the sense there are several growth tailwinds between the current organic momentum and new expansion opportunities.
We already mentioned box office receipts have been trending strong for the industry this year. Data suggests big studios and production companies are favoring investments in big theatrical spectacles that play into IMAX's specialty of delivering a premium format .
This concept referred to as "Blockbusterization" means movie theater operators have an incentive to offer the latest audio and visual projection technology to keep moviegoers engaged for each new release.
The plan to add 110 to 130 new systems globally, up from 92 in 2022 leaves a runway through a larger operating base that should continue into 2024. The steps to upgrade existing locations and install the latest technology are supportive for margins which we see leading to higher earnings.
source: company IR
The other dynamic at play is the understanding that the world remains underpenetrated with only 36% of theaters globally outside of the US and China featuring IMAX technology. The potential that the rates converge toward the domestic benchmark of 63% highlights the significant opportunity over the next decade.
source: company IR
Putting it all together, the trends provide some confidence that the long-term trajectory for the company is secured. According to consensus estimates, IMAX is expected to reach $388 million in revenue this year, while EPS ramps up to $0.86 compared to just $0.06 in 2022 which was pressured at the time by lingering pandemic disruptions.
The market is forecasting revenue growth to average just 3.5% between 2024 and 2025, while earnings climb in the double-digit range based on higher margins.
In terms of valuation, we believe shares currently trading at 22.5x the current year consensus EPS are attractively priced given the company's position as both a segment leader and its "tech" profile. That premium narrows into 2024 given the expected earnings growth.
Our take is that these estimates, particularly on the top line, are too low and the next couple of quarters will confirm IMAX's higher operating and earnings baseline. The potential for stronger-than-expected results going forward represents the bullish case for the stock which we believe is on the table.
Seeking Alpha
IMAX Stock Price Forecast
We rate IMAX as a buy with a price target for the year ahead at $24.50 representing a 22.5x multiple on the next year's consensus EPS of $1.09 for 2024. The way we see it playing out is that the company's Q3 earnings report, expected to be released in late October or early November, should incorporate record receipts from the Oppenheimer movie. The potential that management raises full-year guidance with a positive 2024 outlook could be enough to lift the stock higher with a new wave of momentum.
On the downside, the risk here is that IMAX remains exposed to global macro trends. A deterioration in consumer spending metrics or a broader economic slowdown could pressure box office momentum, forcing a reassessment of the earnings outlook, and opening the door for a deeper sell-off in the stock.
Monitoring points over the next few quarters include trends in the EBITDA margin as a key financial benchmark along with the evolution of the system's backlog.
Seeking Alpha
For further details see:
IMAX Corporation Stock: Bullish Following A Blockbuster Summer