Analyst: IMAX Looks Primed to Benefit From Year-End Activity

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

IMAX (NYSE:IMAX) will report second-quarter 2014 (June) results before market open on Thursday and hold a conference call at 5:30 a.m. Pacific (dial-in: 800-524-8950, conference ID: 1883257; webcast: imax.com/corporate/investors).

We are decreasing Q2 estimates to reflect weaker-than-expected box office results for IMAX. We are also adjusting our expectations for Q3 and Q4 as we gain greater visibility into the IMAX film slate. We expect Q2 revenue of $78 million and EPS of 23 cents versus prior estimates of $83 million and 29 cents, and consensus of $79 million and 25 cents. We are initiating FY:15 estimates for revenue of $340 million and EPS of $1.03.

Q2:14 box office was down 6.6 percent, with May and June very weak after a strong April. Year-over-year, April was up 21.5 percent, May ended down 11.9 percent, and June ended down 16.3 percent. Q3:14 is off to a slow start, down 36 percent quarter-to-date. Independence Day weekend results this year were the worst since 1999 and down over 40 percent year-over-year. Poor results were due to several factors, including a Friday Fourth of July shortening the weekend and large viewership of the World Cup.

The exhibitors’ in-house Premium Large Format screen brands appear to us to be a legitimate competitive threat to IMAX. We believe certain DMAs under-penetrated by IMAX have become ripe for alternative PLF formats privately branded by the exhibitors, as those exhibitors may not have the rights to IMAX screens in the particular DMA where they have interest in a large-format screen. In addition, we believe Cinemark’s penetration of its XD brand in Latin America is a strong threat. IMAX, based in Mississauga, Canada, specializes in motion picture technologies.

Several agreements with Chinese firms help to solidify IMAX’s strength as a premium large-format-screen brand in the country. In early April, IMAX announced the sale of a 20 percent stake in IMAX China to strategic Chinese investors with a number of key goals for the transaction, including continued expansion of IMAX’s theater network in China, the sustained performance of IMAX’s Hollywood and local titles, and strengthening government and industry relationships there.

We are maintaining our NEUTRAL rating and our 12-month price target of $28. Our price target reflects roughly 28x our FY:15 EPS estimate. It is not clear that the IMAX China transaction unlocks significant value that wasn’t already reflected in IMAX’s share price, especially given the per-screen valuation. The stock appears primed to benefit from a strong release slate towards YE, as well as heavily back-end loaded installs and results.

Michael Pachter is an analyst at Wedbush Securities.

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