Imax Shows Signs

The stock jumps on a Warner Bros. linkup.
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While the American mantra that bigger is better hasn't seemed to pay off for Canadian movie tech outfit

Imax

(IMAX) - Get Report

, things could be looking up for investors in the maker of huge screen spectaculars.

The fervor surrounding mobile small screen technologies, home theater systems and other viewing platforms has left Imax, the producer of large scale theatrical magic, caught in a vortex of doubt about whether the company can capitalize on its mission.

Imax Thursday rolled out a partnership with

Time Warner's

(TWX)

Warner Brothers to release the studio's next blockbuster,

V for Vendetta

, starring Natalie Portman, on Imax this March.

Both companies have enjoyed a steady stream of stellar box-office returns with their recent ventures. And beyond already announced deals, which already include some much anticipated films like

Superman Returns

, if Imax now adds at least one more big picture to its 2006 film slate, which sources say it will, it will further validate its growing reputation as a box office booster with Hollywood studios.

While all the industry rage and chatter is about how much content media companies can jam on tiny video screens, Imax skips along signing lucrative licensing agreements around the world and striking deals with Hollywood studios to put their fare out in Imax.

In 2005, Warner Brothers'

Charlie and the Chocolate Factory

,

Batman Begins

and the latest

Harry Potter

all surpassed $200 million in box office, a record that was especially poignant in a year when overall box office returns declined 5%. But Warner Brothers hit those numbers with significant Imax help.

The returns helped Warner beat out

News Corp.'s

(NWS) - Get Report

20th Century Fox by $25 million overall last year, with Imax-generated box office on the films accounting for about $100 million of the yield.

But the stock has suffered significantly over the last couple of quarters, missing by a penny here and a penny there, and sending the stock down to the low end of its 52-week stride at $7 from higher levels of $10 and $11. Investors are scratching their heads about this company.

Analyst opinion has been mixed, with one lowering his price target, another questioning how many theater exhibitors will opt for Imax conversions and a third saying that this might be Imax's year to shine.

Co-chairman Richard Gelfond says that "some are focused on macro trends and some on the penny miss in the third quarter. By every metric we've shown significant year-over-year growth." In 2004, for example, Imax signed agreements for 36 theaters; it will easily hit 40 to 45 for last year. Moreover, Imax box office returns were up 35% last year.

While there is a drag on the theatrical exhibition business given the tightening of release windows between movie openings and DVD releases, Gelfond asserts that "people will leave home if something is compelling enough for them to do so." That premium audiences are willing to pay to see large scale movies in the Imax format seems to justify that assertion.

The other factor that seems to handicap the stock is the idea that upgrade-minded film exhibitors will choose something obtusely referred to as "digital" instead of Imax. That debate revolves around the cost savings of exhibitors using digital projectors and screens and the worry they won't dole out the upfront cash to convert theatres to Imax.

Gelfond explains that while digital upgrades are inevitable and a digital strategy is something the company is in the process of working on, "Digital conversions are not a competitive product with Imax." The notion that it's either go big with Imax for $1.5 million in capital or upgrade to digital is a red herring, according to Gelfond. Gelfond notes that films in the standard 35-millimeter format are marginally improved when digitized, but they simply don't compare to the experience an Imax picture produces for the viewer.

Disney

(DIS) - Get Report

worked with a California company called Real D to convert animated feature

Chicken Little

. The studio is said to have paid about $8 million to $10 million using Real D's technology. The payoff: breakeven or slight loss for the investment. Compare that to Tom Hanks'

Polar Express

, which grossed $45 million in Imax when first released and tacked on an extra $15 million when re-released this past Christmas season.

SunTrust Robinson Humphrey's Christopher Rowen cut Imax stock to neutral from buy late last year, saying midsize exhibitors showed only middling interest in adapting their theaters to Imax. At issue was the appeal of Imax to midsize theater owners, who according to Rowen are not going to sign up quickly enough to propel Imax forward.

But on Thursday, Rowen raised the stock to buy. He said that recent developments -- such as the Warner Bros. deal and last week's announcement that big exhibitor National Amusements has signed up for two new installations -- have addressed concerns he raised in December.

"Our downgrade was based on lukewarm feedback from small domestic theater chains, worries that large chains would not pick up the slack, potential for more revenue share deals, and lack of a 1Q06 Hollywood film," said Rowen, who sees the V tie-up boosting the prospect of a takeout. He puts an $11 target on the stock.

Between licensing agreements with exhibitors and concurrent deals with Hollywood, Imax sees some 15% of Hollywood box office returns overall. The company gets about 4% of the box office from its licensed theaters and between 10% and 15% of studio receipts from a blockbuster Hollywood film on Imax screens. Not bad, given the fixed costs of converting to Imax.

Gelfond insists that both his company and studio partners are better off looking at things on a film-to-film basis, and doesn't think a more formal partnership is in anyone's best interests at the moment. In the meantime,

V for Vendetta

will be released in Imax shortly, followed by Wolfgang Peterson's

Poseidon

, as well as

Superman Returns

in early summer of 2006 along with a 3D computer-generated film called

Ant Bully

and another CGI-animated effort called

Happy Feet

will all be available in Imax this year.

Early Thursday, Imax shares rose 30 cents to $7.80.