Lights! Camera! Profits!

Benj Gallander and Ben Stadelmann
Friday, June 3, 2011

As one searches for stocks that will jump in value, it is all but inevitable that a number will be identified as potential buys. But odds dictate that some will move significantly higher without cash being plunked on the table. Once that happens, one can sit back and cry into the porridge, but ideally some questions should be pondered. Why was the stock a good prospect? What delayed one from committing? Did the analysis miss any key success variables, or did the company just defy the odds? The goal, of course, is to make better decisions in the future.

Founded in 1967 in a Toronto suburb, IMAX Corp. has become a mainstream company with a global brand. Way back when, in 1971, the world’s first permanent IMAX theatre, the Cinesphere, was built by Toronto architect Eberhard Zeidler for the grand opening of Ontario Place. In the 1990s some Hollywood movies were shown on this IMAX screen, such as the legendary 2001: A Space Odyssey and that dinosaur thriller, Jurassic Park.

Recently, with the ultramodern big-screen mega-theatres being built, this iconic cinema was rendered Mesozoic. Still, die-hards reminisce about the original 70mm IMAX films, where the viewer was immersed in a battle with the rapids of the Colorado River and a symphony of migrating birds danced North of Lake Superior. Though many Canadians have known about IMAX for decades, its compelling story really got into full gear in 2009, with the hype surrounding James Cameron’s Avatar: An IMAX 3D Experience.

IMAX’s stock started trading in 1994 and was not kind to investors. Traders had a better time with it. A few years after the dot-com bubble burst and the stock crashed from nonsensical heights, it came up on our radar screen. Our contrarian model identified this company as a potential buy because its technology remained impressive, and a potential turnaround wasn’t inconceivable.

But when we consider a potential purchase, many important attributes are related to the financials, and this is where IMAX did not score well. Perhaps due to the nature of the business, the accounting was anything but conservative, and it seemed that management was having a tough time trying to make the technology sustain a consistently profitable enterprise.

The corporation stayed on our watch list but never moved high enough to distract from more compelling opportunities. When it first broke the $10 mark, we were skeptical. The company was trying to sell itself while in the midst of a transition from a film-based to a digital platform. Serious problems existed, and the stock dropped accordingly.

The firm was able to recapitalize and transition to digital, but it meant sustained losses. That tempered a lot of investors’ enthusiasm, including ours, although as seen in current financials, the move turned out to be quite cost effective.

Ultimately, it was a confluence of factors that started IMAX sizzling. The handshake with Hollywood studios and the acceptance of 3D as a legitimate force were key. It got the bums to move from the SUV seat to the IMAX seat, and even pay a premium for the privilege.

Signing large joint-venture agreements with distributors was vital. Now that it has inked similar deals in China, the stock’s rise to glory has been fast and furious, tripling since August. We were neither nimble nor strong believers that all of the variables would come together. Evidently, they did.

One potential enterprise that turned into an actual holding for us is International Datacasting. An Ottawa-based firm, it operates in the film sector by using its satellite technology to beam motion pictures to theatres as digital files. Recent results have been the best in corporate history. A competent management team is even more confident about the future. Though the party for IDC will never match the glamour and decadence of IMAX, it’s showing signs of creating some delightful cinema.