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Editor's note: This Stocks Under $10 alert was originally sent to subscribers Nov. 20 at 3:59 p.m. EST. It's being republished as a bonus for and readers.

A couple of twists in the plot have sent shares of


(IMAX) - Get IMAX Corporation Report

tumbling over the past four months. Along with its stock price, the credibility of the company has been shattered. But several upcoming events could make this stock a speculative buy for risk-tolerant investors as more information unfolds about the company's legal problems.

Earlier this year, when shares were trading around $10, the giant-screen movie-system maker offered itself for sale. Initial interest came from entertainment titans


(SNE) - Get Sony Corp. Report


Time Warner


as analysts speculated that Imax shares were worth anywhere from $12 to $14.

But on Aug. 9, Imax announced that it had failed to find a buyer and was also being investigated by the

Securities and Exchange Commission

for the timing of revenue recognition. Shares plunged that day and then continued to fall over the next two weeks to $4.43, dropping more than 50% from their Aug. 8 high as a slew of shareholder lawsuits ensued.

Then on Nov. 9 -- just when investors thought that the worst-possible scenario was priced into the stock -- Imax reported a third-quarter loss of 28 cents a share, 27 cents worse than the analyst consensus estimate. Shares fell an additional 20% on the news, where they remain with the stock recently trading at $3.41. Even at this price, Imax shares are very risky, but several catalysts could make for a speculative buy down the road for investors who can handle the risk.

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Imax's third-quarter shortfall was blamed on installation delays of its 3-D projection system and soft film revenue because of a surprisingly poor box-office performance of

The Ant Bully

. A look at Imax's past results shows the company's strong dependence on hit movies. Last year,

Harry Potter and the Goblet of Fire

and a re-release of

The Polar Express

were big winners for the company and helped to boost earnings and the share price.

In February, Imax raised its full-year earnings estimates on the basis of expected strong showings of

V for Vendetta




Superman Returns

, as well as the computer-generated films

Open Season


The Ant Bully

. However, although

Superman Returns

broke box-office records, the other movies turned out to be major disappointments.

Because the two prior computer-generated films this year did not live up to expectations, there was little optimism among analysts that

Happy Feet

-- another computer-generated film that opened this past weekend -- would generate any buzz that would bring in a larger audience.


Happy Feet

, an animated penguin movie that was released in both conventional theaters and Imax 3D, silenced the critics, earning more than $42 million total over its first weekend. That's almost double the amount

Open Season

brought in, and much more than the $8 million that

The Ant Bully

grossed in Imax and conventional theaters combined during their first weekends.

This is very good news for Imax, because the company is preparing to release two of the most-anticipated movie releases of 2007 on its big screen:

Spider-Man 3


Harry Potter and the Order of the Phoenix

. On the basis of previous box-office results from these franchises, there's a strong possibility that both of these films could be on the list of all-time top-10-grossing movies. Moreover, I believe the success of

Happy Feet

and the two other possible blockbusters coming in 2007 could revive buyers' interest in Imax.

Today, Imax shares are trading about 65% lower than their July and March highs -- and rightly so after factoring in the company's deteriorating fundamentals, shareholder lawsuits and the SEC investigation. On the other hand, Imax is a strong, well-known brand that provides an experience many kids may find unforgettable. Plus, the previous takeover interest in the company could offer downside protection at the current price.

Despite several pluses for the stock, however, the risk of owning shares is still great, according to the company's financials. Profit margins are down substantially, and Imax has negative cash flow. In addition, its balance sheet is stretched, with $160 million in debt and only $26 million in cash.

Even though all is not well for Imax, I believe speculative investors could be rewarded because of several catalysts that could emerge in 2007. But I would continue to wait on the sidelines until clarity develops regarding the SEC investigation. Even though the potential for share-price appreciation exists, I believe the risk still outweighs the reward.

We should learn more when Imax reports fourth-quarter results in February 2007, a few months before the scheduled releases of

Spider-Man 3


Harry Potter and the Order of the Phoenix

. Until then, Imax will be on our

Stocks Under $10

Watch List.

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at, where he works closely with Jim Cramer and and writes Stocks Under $10

. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;

click here

to send him an email.