Analyst: JV Theater Installations May Benefit IMAX Financial Results

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

Lowering our Q3 estimates to reflect weaker-than-expected box office for high-profile worldwide releases. Although IMAX (NYSE:IMAX) no longer provides mid-quarter or end-of-quarter box office updates, it appears that Elysium, Pacific Rim, and Riddick likely did not perform at the levels we initially expected. For Q3 we now expect revenue of $58 million and EPS of $0.07, vs. our prior estimates of $64million and $0.15, and consensus of $55 million and $0.08. We have left our Q4 estimates unchanged, however, as Gravity, which should benefit from outstanding reviews, can likely offset the impact of lower revenue spillover from Q3 releases. For FY:13 we now expect revenue of $280 million and EPS of $0.67, vs. consensus of $285 million and $0.73. It does not provide quarterly or FY guidance.

Our Q4 box office expectations may be overly conservative. The release slate in the first half of the quarter appears to be somewhat light apart from Gravity, but we continue to expect The Hunger Games: Catching Fire and The Hobbit: The Desolation of Smaug to be among the year’s top performers. We will re-evaluate our Q4 expectations after we know the Q3 box office figure and have had a chance to see how the two aforementioned sequels perform.

Focus on JV theater installations could have a positive impact on long-term financial results. These installations require little or no payment by the exhibitor partner, and accordingly, generate little revenue in the year of installation. The trade-off is that the exhibitor partner commits to paying an incremental 20 percent of attendance in exchange for IMAX’s agreement to finance the installation, meaning IMAX’s revenue stream is substantially enhanced over the life of the JV contract.

Investment Thesis: Despite an increasing backlog and a consistent stream of high-profile theater signing announcements, management appears content with a slow installation pace that limits long-term growth. That footprint expansion appears to be stuck at around 120 screens per year; with some operating leverage, that suggests to us that IMAX can grow earnings by $0.30 per year long-term once execution improves and the pace of installations increases.

Maintaining our NEUTRAL rating and our 12-month price target of $28. Our price target reflects roughly 22x our FY:14 EPS estimate of $1.25. Despite a disappointing 1H, the stock appears primed to benefit from a strong release slatetowards year-end, as well as heavily back-end loaded installs and results.

Michael Pachter is an analyst at Wedbush Securities. 

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