DEEP EQUITY ANALYSIS: IMAX Box Office Sales Update and Outlook

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

On Monday, IMAX (NYSE:IMAX) announced Q2:12 worldwide gross box office of $174.7 million ($78.1 million domestic and $96.6 million international), above our estimate of $168.8 million ($73.1 million domestic  and $95.7 million international). Worldwide gross box office was up over 60% in Q2 y-o-y, and wasup almost 75% y-t-d. We believe Titanic in 3D,  Marvel’s The Avengers,  Men in Black 3, and Prometheus were among the stronger performers.

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We estimate that the box office beat will have a limited impact on EPS, likely less than $0.01. However, we are lowering our EPS estimates for FY:12 to reflect lower profitability in certain segments and higher  conversion fees  for FY:13 to reflect a larger release slate. For FY:12, we now expect revenue of $307 million, up from our prior estimate of $306 million, to reflect the Q2 box office beat, and EPS of $0.98, down from $1.04. For FY:13, we expect revenue of $339 million, unchanged from our prior expectations, and EPS of $1.16, down from $1.30.

Significant expansion opportunity remains. At its investor event last month, IMAX increased the number of zones that can accommodate an IMAX screen to 1,700, up from the 1,500 – 1,550 provided at the end of Q3:11, and the 1,200 –1,250 expected before then. IMAX ended Q1:12 with 510 commercial multiplexes, only 30% of its worldwide footprint growth potential (62% penetration domestically, and only 17% elsewhere). We believe the company’s earnings potential is reflected in its expanding footprint and its screen backlog.  In our view, IMAX is likely to double its footprint over the next few years, so earnings could be substantially higher in each of the next several years.

Conservative installation guidance for 2012.  After installing 137 new theater systems in 2011, IMAX currently expects to install only 95 – 100 systems in FY:12, a y-o-y decline of 27-31%. The company previously indicated that guidance is likely to increase by its next earnings call.

Maintaining our OUTPERFORM rating and 12-month price target of $27, based on a 23x multiple applied to our revised 2013 EPS estimate of $1.16. Although the release slate has improved, and full-year installs guidance will likely be achievable, our PT continues to reflect a discount to IMAX’s earnings growth rate due to the uncertainty of the pace of footprint expansion.

Michael Pachter is an analyst at Wedbush Securities.

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