IMAX Earnings: A Surprise and Thoughts on the Upcoming Release Slate

IMAX (NYSE:IMAX) Q1 EPS was below expectations due to upgrades and SG&A spend. Revenue was $56 million, versus our estimate of $52 million, and the consensus estimate of $54 million. Adjusted EPS was $0.06 (excluding $0.02/share of charges), versus our estimate of $0.11, and consensus of $0.08. EPS was below our expectations due primarily to higher-than-expected upgrades and SG&A spend (China and new brand campaign). The company does not provide forward financial guidance.

Increasing our FY:12 estimate for revenue to $306 million from $304 million, but decreasing our EPS estimate to $1.04 from $1.13 to reflect Q1 results and revised expense expectations.  Decreasing our FY:13 estimates for revenue to $339 million from $340 million and EPS to $1.30 from $1.39.

Strong upcoming release slate. IMAX Corporation 2011 performance was negatively impacted by an abundance of animated movies aimed at families. This year, the company has a large number of broad appeal potential blockbuster releases, including The Avengers, The Amazing Spider-Man, Battleship (certain international markets),  The Dark Knight Rises,  Men in Black III, and  Skyfall. In addition, The Hunger Games will be returning to North American IMAX theaters for a week onApril 27, having already generated $13.2 million of box office in its original run.

Conservative installation guidance for 2012. After installing 137 new theater systems in 2011, IMAX maintained FY:12 guidance of 95 – 100 installations, a y-oy decline of 27 – 31%. The company indicated that installation guidance is likely to increase by the time that IMAX holds its next earnings call, likely due to negotiations under way that have not yet been finalized.

Disconnect between the backlog and installation guidance. Despite a backlog of 261 theaters, FY:12 installs guidance is for 95 – 100 theaters, implying IMAX would have to install ≈ 100 theaters every year for 2.5 years just to catch up with its backlog. We believe it continues to provide details about its plans that investors find confusing.

Maintaining our OUTPERFORM rating and 12-month price target of $27, which is based upon a 21x multiple applied to our revised 2013 EPS estimate of $1.30 EPS. Although the release slate has improved, and full-year installs guidance will likely prove 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 Morgan.