IMAX Earnings Preview: Looks Like More Growth is Needed

IMAX (NASDAQ:IMAX) will report Q2 2011 results before the market open on Thursday, July 28. We expect results in-line with our recently revised estimates. We expect the company to report results in-line with our estimates for revenue of $66 million and EPS of $0.27, compared with consensus for revenue of $63 million and EPS of $0.20. The company does not provide forward financial guidance. On July 7, we lowered FY:11 and FY:12 estimates to reflect lower DMR revenue expectations and higher assumptions for SG&A (due to IMAX China) and R&D. It is possible that the company will report lower earnings, but we expect a higher theater forecast.

Although a number of 1H:11 releases underperformed expectations, IMAX (NASDAQ:IMAX) box office results for many recent blockbusters have reinforced our belief that IMAX theaters are the preferred venue for a premium viewing experience. IMAX global box office highlights include: Pirates of the Caribbean: On Stranger Tides (NYSE:DIS) and Transformers: Dark of the Moon both surpassing $40 million, and Harry Potter and the Deathly Hallows: Part 2 (NASDAQ:NWSA) generating $23 million in its first weekend.

We believe ever-increasing backlog growth will require installations to accelerate. Based upon the pace of new orders, we estimate IMAX will be required to increase installations again in 2012, perhaps to as many as 150 – 175 screens. If the number of new orders continues to grow, IMAX may find itself growing earnings even more rapidly than the 60% rate that we have modeled for 2012.

We continue to value IMAX (NASDAQ:IMAX) based upon its expanding footprint. In our view, IMAX is likely to double its footprint over the next three years, driving rapid earnings growth. The leverage on the company’s revenue growth is impressive, and we think earnings could triple by 2014, suggesting the stock is cheap at current levels.

Michael Pachter is an entertainment analyst at Wedbush Morgan.

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