IMAX Earnings Preview: Will Expenses DOMINATE?

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

IMAX (NYSE:IMAX) will report Q2:12 (June) results before market open on Thursday, July 26, and hold a conference call at 5:30am PT (dial-in: 866-321-6651, conference ID: 5745205, webcast: http://www.imax.com/corporate/investors).

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Expect earnings to be in-line with our recently revised estimates. We expect revenue of $73 million, vs. consensus of $72 million, and EPS of $0.17, vs,consensus of $0.22. On July 2, IMAX provided a worldwide Q2:12 gross box office figure of $174.7 million ($78.1 million domestic, $96.6 million international), exceeding our earlier estimates. Worldwide IMAX box office was up over 60% y-o-y in Q2. However, we estimate that the box office beat will have a limited impact on Q2 EPS, likely less than $0.01. IMAX does not provide forward financial guidance.

Earnings pressure from phasing of expenses. Our EPS estimate is below consensus due to our belief that SG&A will be up in dollars (but lower in percentage terms) year-over-year.

Significant expansion opportunity remains. At its June investor event, IMAX increased the number of zones that can accommodate an IMAX screen to 1,700, up from the 1,500 – 1,550 provided at the end of Q3:11, and the 1,200 – 1,250 expected before then. IMAX ended Q1:12 with 510 commercial multiplexes, only 30% of its worldwide footprint growth potential (62% penetration domestically, 17% elsewhere). We believe the company’s earnings potential is reflected in its footprint and backlog. In our view, IMAX is likely to double its footprint over the next few years, so earnings could be substantially higher in each of the next several years.

Expect an increase to conservative 2012 installation guidance. After installing 137 new theater systems in 2011, IMAX expects to install only 95 – 100 systems in FY:12, a y-o-y decline of 27 – 31%. This compares to a backlog of 261 theaters, implying IMAX would have to install ≈ 100 theaters every year for 2.5 years just to catch up with its backlog. IMAX previously indicated guidance is likely to increase by the next earnings call (this Thursday). Based upon press releases since its Q1 results release on April 27, we expect JV guidance to increase by at least 10 and STL guidance to increase by at least five.

Maintaining our OUTPERFORM rating and 12-month price target of $27, based upon a 23x multiple applied to our 2013 EPS estimate of $1.16. Although the release slate has improved, and full-year installs guidance will likely be 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 Securities.

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