Let me begin by saying that I love watching films in the massive format provided by Imax Corp (USA) (NASDAQ:IMAX). This is not a dig on Imax technology, but on Imax stock itself. When I refer to Imax being the Tesla Inc. (NASDAQ:TSLA) of the movie business, I do not mean Imax is a fraud or that it is losing money.
I’m saying that Imax stock is only being sustained by hype. The truth is that it’s kind of a mish-mash of businesses, none of which do particularly well, but do well enough to make a profit and stay in business. Source: Flickr
It’s just that there is no growth and never will be.
Not even CEO Rich Gelfond will say what business Imax is in. In a Bloomberg interview the other day, within a minute of saying, “We are not an exhibitor. We are a technology provider,” he said, “We’re in the blockbuster business.”
What is Imax if not an exhibitor? It screens movies. And Gelfond admits it by saying Imax stock is in the blockbuster business. Yes, it’s a technology provider also, but much of what it provides isn’t making a difference in how many consumers choose to watch an Imax film.
Imax generates revenues in very simple ways. First,Imax sells and leases its proprietary systems. Then it services those systems; re-masters films to fit the Imax format; makes a few non-Hollywood films; and has revenue-share plans with exhibitors for certain films.
The Problem With Imax Stock
The problem with Imax stock is that none of these segments have shown any meaningful growth for years, yet Imax stock trades at 270 times TTM net income. Yes, you read that correctly. Even worse, look at net income from FY12 through FY16: 2012, $41.3 million; 2013, $44.1 million; 2014, $39.7 million; 2015, $55.8 million; and 2016, $28.8 million.
And you thought Amazon.com, Inc. (NASDAQ:AMZN) was bad? At least AMZN stock pumps out billions in free-cash flow every year.
Look at how Imax stock breaks out its revenue streams. Equipment and product sales literally went nowhere for five years (2010 to 2014) — $72.5 million in 2010 to $78.7 million in 2014. It jumped in 2015 to $119 million but then grew weakly to $122.4 million in FY16. Imax stock had its best year in the last ten years in 2015 — $55.8 million in net income, yet traded at over 125x earnings at the time.
Imax only has limited real estate into which it can install systems. And these installations are not big revenue generators. Imax said it installed 136 theaters in 2015. But it only generated $119 million in revenue that year. The installations bring in less than $1 million each. And they cost roughly half what is charged.
So Imax touts upgrades for its systems as often as it can. Digital projection. Laser projection. Sound upgrades. VR technology.
Big Things for Imax Stock?
The services segment takes care of maintenance for existing systems and re-master films for Imax theaters. That revenue is erratic but has grown from $65 million in 2007 to $167 million in FY16. Services obviously will increase as Imax’s theater base increases. However, as mentioned, there are only so many Imax theaters that can be built in the world. Consequently, service revenue will plateau at some point.
The rentals segment has increased 10-fold in the past 10 years, and generated $77 million last year, but that was a decline from $83.6 million.
See any patterns? I see Imax treading water.
But wait — surely the revenue share on those blockbuster films must mean big things for Imax stock.
Nope. All those numbers I quoted? They include the rev shares. You wouldn’t know that, however, because Imax doesn’t break out those numbers. The words “revenue share” do not even exist in the 10-Qs, and only once in the 10-K.
Bottom Line on Imax Stock
The revenue-share plan was supposed to be the holy grail for Imax. That’s what bulls have been screaming about since Avatar. The reason hasn’t translated into anything significant is because the deal is usually for about 15% of the box office for Imax presentations of films. Take Star Wars: The Force Awakens. It generated $48 million in box office worldwide on opening weekend. Imax only got around $7 million in revenue that weekend. Get it?
Imax stock is at $26 per share. I see no reason for it to trade at 273x earnings. Usually, a company that doesn’t grow its net income will generate solid cash flow, which gets spun out as a dividend. Not Imax stock. So why are you holding it? I say, “Sell Imax stock.” Not only that, consider shorting once the new Star Wars film opens.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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