The 2009 hit film Avatar was a watershed event for Imax Corp., and the release of the long-awaited sequel has underlined what investors see as a strong case for shares of the large-screen theater chain at a time when movie-going is out of fashion.
Imax's shares have fallen less this year than those of rivals, benefiting from an environment that's split between smaller films that increasingly go direct to streaming and blockbusters, where audiences have shown a willingness to pay up for a more immersive experience. The release Friday of Avatar: The Way of Water could prove to be the year's foremost example of the latter.
“Avatar was developed with Imax equipment, for an Imax experience, so it will benefit from not only the box office, but also the exposure,” said Michael Obuchowski, chief investment officer at Merlin Asset Management, which owns the stock. “Imax is attractive any way I look at it, with a valuation that is incredibly attractive relative to its long-term growth potential, but the hype around Avatar will be really helpful.”
Imax shares have fallen 13 per cent in 2022, compared with a 24 per cent drop for Cinemark Holdings Inc. and a 66 per cent collapse for AMC Entertainment Holdings Inc., one of the most high-profile “meme” stocks. The S&P 500 Index is down 15.66 per cent.
Avatar, a science-fiction epic from director James Cameron, remains the highest-grossing film in Imax history. There were only 300 Imax screens when it was released in 2009, compared with more than 1,700 screens currently, the company said in an email.
The original opened just before Christmas 2009, but Cameron was already promoting the movie — and by extension, Imax cinemas — in the summer of that year. From June 30, 2009, through the end of 2010, Imax shares more than tripled. By early 2011, an analyst was calling Imax “the Louis Vuitton of theaters.”
An Imax spokesperson declined to give a projection on how the second film could perform, but said the company was “very optimistic.”
Last month, Imax's chief executive officer said the Walt Disney Co. sequel had “one of the highest pre-sale levels we've ever seen” for tickets, and noted it was cleared for release in China, Imax's biggest market in terms of 2021 revenue. While China continues to struggle with Covid, Securities Daily last week reported that more than half of the country's cinemas have resumed operations.
BIG SCREENS
This is a turbulent time for the film business: The pandemic shut cinemas around the globe, while at the same time streaming services sprang up that offer movies and TV shows with A-list talent and budgets, diminishing the allure of cinemas. According to Bloomberg Intelligence, year-to-date U.S. box office receipts are a third lower than levels in 2019, the last pre-Covid year.
However, 2022's hits emphasize why more than 80 per cent of analysts recommend buying Imax, compared with 50 per cent for Cinemark, and none for AMC. The top-grossing films of the year — Top Gun: Maverick, Doctor Strange in the Multiverse of Madness, Black Panther: Wakanda Forever, and Jurassic World: Dominion — are the type of big-budget titles where studios favor theaters over streaming for initial releases, and which offer the type of spectacle Imax is associated with.
“The biggest movies are going to find an outlet, and Imax is the best venue for that,” said Jim Stoeffel, a portfolio manager at Royce Investment Partners, which owns Imax in several of its funds. “Its position in the industry is pretty secure, and I'm hard pressed to think of what might end that.”
Stoeffel also touted Imax's valuation. The stock trades for 19.6 times estimated earnings and 2.5 times forward sales, both of which are below its 10-year average multiple. It is also cheaper than Cinemark and AMC in terms of forward earnings, while the 18 per cent revenue growth expected next year eclipses the pace anticipated for the other chains.
“We see room for Imax to grow sales at a disproportionate level, and room on the valuation side,” Stoeffel said. “If Avatar is really big, we could see that upside come to fruition.”
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