Motion pictures are a big business and Hollywood alone clocks an average annual turnover of $11 billion. IMAX Corporation (USA) (NYSE:IMAX) was quick to recognize the potential in the business and brought in a technology which truly revolutionized the entire movie experience.
IMAX Corporation (USA) (NYSE:IMAX) posted robust revenue and profits for fiscal year 2012, generating revenue of $280, which is a 21% jump from last year. IMAX realizes that in order to maintain high growth, it has to look beyond the American shores and with this clear and focused intent, it has continued to expand its footprint in the overseas market. The company identifies APAC, Europe, and Latin America as its major foreign markets.
New markets
China has been on the company’s radar for quite some time, and it is evident from the company’s annual report for the fiscal 2012, which suggests that China is its largest market outside America. In order to further penetrate the Chinese movie market, the company entered into a landmark 75 theater revenue sharing deal with China’s Wanda Cinema Line which is the firm’s largest deal outside the American market.
The introduction of the joint revenue sharing agreement has led to a significant increase in the company’s theater penetration across the globe. This has enabled the company ink deals with major filmmakers and theaters to push the IMAX experience and develop a market in new areas.
A closer analysis of the company’s financials reveals a similar mood in the market with a forward P/E (FYE 2014) pegged at 20.42 compared to current P/E of 42.55. Moreover, a PEG ratio of 0.9 vividly exhibits there is a broad consensus of future earnings growth for the company.
Competitive scenario
IMAX Corporation (USA) (NYSE:IMAX), with its patented revolutionary technology, operates in a space with virtually no direct competitors, as IMAX provides technology to both theater companies and filmmakers for an enhanced movie experience. However, the company faces emerging competition from North America’s largest theater group, the Regal Entertainment Group (NYSE:RGC) and Cinemark Holdings, Inc. (NYSE:CNK), which offer cinema goers an impressive experience at relatively cheaper prices.
However, a complicated legal battle between Cinemark and IMAX is ongoing related to the alleged use of IMAX’s patented technology by the former to make its own XD experience theaters. It is noteworthy that Cinemark poses a significant challenge to IMAX, as the company plans robust expansion. Keeping this in mind, the company recently entered a deal to acquire Rave Cinemas for $240 million, which will enable it to prop up its market share (Cinemax is the third-largest chain in the U.S.)
Additionally, the company plans to invest heavily in the technology segment and develop its XD theaters for an enhanced movie experience. With a focused approach, Cinemark achieved a post tax bottom-line of $170 million for FY 2012 and sufficient funds to invest in newer technology and deeper penetration of the market.
IMAX Corporation (USA) (NYSE:IMAX) finds another competitor in Regal Entertainment, one of the largest theater groups in the U.S. Interestingly, Regal Entertainment is also one of IMAX’s largest customers, as the company is making several efforts in order to bring its own set of large screen movie experience under the RPX brand.
Regal Entertainment, like Cinemark, is actively involved in acquisitions, as it has completed two major deals in the last six months. The company acquired Great Escape Theaters and Hollywood Theaters for a combined value of $330 million, which further consolidates its position as a front-runner in the industry. Given the competitive landscape of the industry, it is paramount for IMAX to focus on maintaining its exclusivity in the technology, which it has developed over the years through continuous radical innovation.
Why invest in this stock?
With no direct competition thus far and consistently rising demand for its superior movie experience from emerging markets such as China, the company looks set for robust growth and a greater share of the global market. IMAX‘s growth potential promises robust earnings and revenue figures, as the top-line is expected to surpass $350 million in FY 2014. The estimated growth during the next few years is expected to be around 35%, as the company continuously scouts for new alliances not just in America, but also in other emerging markets.
The entertainment industry largely stays unaffected by the economic downturn, as people usually turn their discretionary spending from costly affairs such as travelling to a weekend movie.
With robust fundamentals and strong positioning within the entertainment industry, I believe IMAX Corporation (USA) (NYSE:IMAX) is certainly a buy for the long-term.
Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Imax. The Motley Fool owns shares of Imax.
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