Imax Corp. (IMAX), which operates giant screened movie theatres as well as licenses the technologies to third parties, reported an outstanding fiscal fourth quarter 2009 on Thursday morning.  The company benefited from the blockbuster success of Avatar, which is arguably one of the most visually appealing movies ever made.  The high screen quality as well as the ability to show 3D films was a key reason for Imax’s surging revenue in the quarter.  To date, Avatar on its own has been responsible for $218 million in box office revenue at IMAX theatres.  In the recent quarter, sales rose 98% to $54.2 million and easily topped analysts’ estimates of $45.3 million.  Earnings came in at $.20 per share easily topping the analysts’ view of 6 cents due to the greatly increased traffic due to feature films like Avatar.

In addition to Avatar, IMAX appears to have another huge blockbuster on its hands as just last week Alice in Wonderland shattered previous IMAX opening weekend sales totals.   Globally, IMAX sold $15.2 mln in tickets with nearly 80% of that from US theatre locations.  The success of the movie’s opening weekend sent IMAX shares more than 18% higher in three trading days coming into the earnings report.  Furthermore, the company said that box office sales to date this year have been $187 mln, blowing away the results from a year ago at this point of only $14 mln.  It is clear that IMAX is really hitting its stride and growth should continue through the next few months with new installments in the successful movie franchises of Iron Man, Shrek, and the Twilight series.

The stock is riding high on its awesome recent performance and currently sits at its highest point since late in the year 2000.  However, some analysts warn that IMAX may face increased headwinds in second half of this year.  There is expected to be a lull in potential IMAX blockbusters, and other theatres are quickly starting to adopt 3D capabilities while not charging the premium IMAX ticket price.  More theatres offering 3D movies would surely cut down IMAX’s market share.  Furthermore, movie studios may start to clamp down on IMAX as they make a better cut from sales at regular theatres.

It is clear that IMAX has performed admirably in the past quarter and should continue to see sales growth into the next few quarters, but as far as valuation is concerned, we would not recommend buying at this price level.  The success at the box office for Avatar has been widely publicized and it may prove to be a ground breaking film that encourages the use of 3D even more often.  However, when looking at the company’s historical price-to-sales metric versus the year just ended (heavily influenced by Avatar) it is clear that the market has priced in much of this growth.  Over the last ten years IMAX has traded for 1.3x to 3.7x sales per share.  In the year just ended the metric has ballooned to 5.9x sales per share.  In terms of price-to-cash earnings per share, the stock has just narrowly returned to profitability in the last year, and while the prospect for earnings growth looks almost certain, the forward looking P/E ratio is not a bargain at over 26x.

Based on our valuation, we would recommend investors not get caught up in the hype over IMAX’s recent performance, and we are maintaining our Overvalued rating.  The company is finally starting to improve fundamentally and strengthen their historically shaky balance sheet, but the market has already awarded the stock with a 277% gain in the last twelve months.

Each week, the group of traders on Fast Money select a small cap stock that they think has the potential to really take off in the near term.  With the mid-week release of what is poised to be a major box office smash, Transformers 2, this week’s pick was in the movie business.

“Let’s get to our rising star. Each week “Fast Money” picks a small cap stock that might be poised to break out. This week Dr. J brings up a movie related name. John, what is it?

Imax, this stock performs like crazy now because they finally have enough penetration that they can get folks into the theaters. Look at a thing like Transformers a big release today…

For instance, with “Watchmen,” it was not a huge success. It had a pop over the weekend, but then it pulled back pretty badly, the marvel comics presentation. Anyway, the issue here with Imax is they only have about 2% of the theaters but they account for about 10% of the money brought in on the big weekends, and the longevity of the people that want to go see it and the Imax experience, I think that’s the big selling point here. That’s why they’re doing so well and with two hot movies coming at them in real fast, rapid succession, Transformers then followed up two weeks later by Harry Potter…” CNBC’s Fast Money 6/24/2009

The point about Imax (IMAX) is that they really benefit from the blockbuster releases that get the fans excited.  The reason being, if the movie franchise’s fan base is pumped about an  upcoming release, it is logical that they may want to seek out an Imax theatre to see it on the highest quality screen.  The numbers seem to back this logic up as Imax sees a surge on major release weekends, even more than a regular movie theatre.

Summer has always been one high time in the movie release cycle, so Imax should benefit from the devoted fans of action flicks like Transformers and the ultra successful Harry Potter franchise.  Other major movie releases could help Imax, but there are clearly the two with the most hype and will likely have the biggest impact on Imax’s quarter.

The traders on Fast Money normally have a far different time horizon than we do at Ockham Research.  Imax stock could certainly do very well in the next couple of weeks with movies being a popular topic of conversation in the lazy summer months.  However, when utilizing our longer term valuation methodology, we see Imax as Overvalued.  The stock hit a seven year low in December, at which point we thought that it was a good buy.  Since that point the stock has just about tripled and can no longer be  considered for a deep value, fundamental investor, as earnings are have been improving but were still negative in the last quarter.  To break even would exceed earnings expectations for the current quarter.  There is certainly growth potential in Imax, but this seems to be more of a pick for the “Fast Money” type trader than a long term value investor because the fundamentals have a lot of work to catch up to the recent appreciation.

To read more on the Imax discussion or anything else that was talked about on “Fast Money” check out our recap page.  Also, all stocks mentioned on the show are listed in the chart for your convenience. 

Dreamworks Animation SKG (DWA) reported earnings that outpaced analysts estimates despite not having a major domestic in theatre release during the first quarter.  Well technically, “Monsters Vs. Aliens” was released in the last week of the quarter, but very little of that was reflected in this quarter.  The studio’s strategy of focusing on family friendly movies appears to have paid off in the last quarter as DVD sales of “Madagascar: Escape 2 Africa” were very strong, as was the film’s international release.  Of the company’s $263 million in revenue for the quarter, $148 million was contributed from the second installment of the wildly successful Madagascar franchise. 

Analysts were expected the company to bring in $212 million in revenue and earnings of 45 cents per share.  Both totals beat the street’s view with revenue of $263 million (68% growth) and earnings of 71 cents per share.  As if the earnings and revenue growth was not impressive enough, the company also improved on gross margins up to 40.6% from 38.6%.

Year to date the stock was down about 25%, but it is getting a nice bounce in after hours trading since reporting the impressive results from the first quarter.  We initiated out Undervalued stance on DWA back in early March.  The shares are rallying nearly 15% in AH, but there could still be legs as Dreamworks seems to have kept the momentum going with a strong start from “Monsters Vs Aliens”.  The studios first 3D movie brought in more than $58 million in its opening weekend, and reports are that the movie has grossed about $320 million already in the young quarter.  Dreamworks seems to have found a perfect niche in the film industry with animated movies that the kids love and its entertainment parents can afford, and branching out to 3D and IMAX (IMAX) is keeping their product fresh.

“Recession proof, that people are looking for cheaper alternative to entertainment and the resurgence of 3d. “monsters versus ailions” the DREAMWORKS picture took $58.2 million in the opening.” Fox Business Network 4/1/2009

The highly anticipated release of the latest installment of the Batman movie series has not disappointed as “Dark Knight” rode huge momentum into the biggest opening weekend in history. The movie—made by Warner Brothers, a division of Time Warner (TWX)—raked in an estimated $155.3 million beating the old box office revenue record held by “SpiderMan 3”. The buzz surrounding the movie’s release was palpable partially due to the untimely death of Heath Ledger, whose portrayal of the Joker has been critically acclaimed and may earn him a posthumous Oscar nomination. Having seen the movie, I am among those that believe that the movie was worthy of the hype. It will be interesting to observe whether or not the glowing reviews of critics and average movie goers will be enough to sustain the hugely successful box office results of this weekend.

Estimates for weekend revenues for “Dark Knight” ranged anywhere from $110 million to $130 million, but the reality beat even those lofty estimates. Overall box office sales of $255 million shattered the previous best weekend of $218 million from July of 2006 (that weekend’s blockbuster was Disney’s (DIS) “Pirates of the Caribbean: Dead Man’s Chest”). This weekend was an important one for movie studios that have seen a slow but steady decline in ticket sales recently. Studios have often claimed that their industry in highly resistant to economic slowdowns because it is still one of the cheapest entertainment options around for cash strapped consumers. Even though box office prices have been rising they are still cheaper than sporting events, theme parks, and travel.

The success of this movie could be a shot in the arm for Time Warner, which it desperately needs. Warner Brother’s studios took a heavy loss on “Speed Racer” earlier this year which cost well over $100 million to make, but brought in a paltry $43 million at the box office. Some estimates have “Dark Knight” breaking even relatively soon, and may bring in over $800 million over the next five years due to everything from box office sales, DVD sales, merchandise, among other revenue streams. The movie has had an amazing opening but the true money maker is in the film’s longevity. The performance of Heath Ledger should go a long way to keeping the movie significant for longer than it otherwise would have.

Now, it goes without saying that even if TMX makes $1 billion from this one movie it is still little more than a drop in the bucket for Time Warner, whose revenues were over $46 billion in 2007. However, this is a very visible and news worthy success thus far and it is a timely reminder of what a company that looks undervalued by our methodology. Historically, Time Warner has traded between 9.4 and 16.1 times cash flow but currently it trades at 6.9 times. However, Time Warner is such a diverse company that this success could be swallowed up by the behemoth, but it certainly has not hurt.

Dark Knight may have a much larger effect on a smaller company, IMAX (IMAX). The demand for Dark Knight tickets in IMAX theatres has been huge as it played in 94 of their U.S. theatres, many of them sold out of all show times weeks in advance. The IMAX theatres brought in nearly $7 million, and the IMAX screens continue to be in demand as some of the scenes from “Dark Knight” were shot specifically for IMAX’s unique technology. Currently, Ockham has IMAX rated a hold mainly because in the last year the stock is up 63%, but it may still have further to go as the company continues to grow rapidly and blockbuster releases such as this heighten the profile of the relatively small company.