IMAX has a what looks like a Toll Bridge Moat: If you want to see an IMAX movie, you have to go to an IMAX theater because they've the only cameras, filmstock and projectors that give that huge dome theater experience. Unfortunately, I have no idea what its worth because it doesn't seem to be able to sustain its earnings and value, in a business, comes from what buyers are willing to pay for the future cash that comes from the business.
In Rule One investing we don't treat a stock like a stock. We look at it as a business and value it as if we were going to buy the whole thing. That's why future cash production is so important to us; we treat it as the most reliable way of judging the value of the business today.
Most stock investors don't really care about future cash because they know they will not own the whole business and, therefore, the future cash is only theoretical. It will never actually end up in their pocket. But for Rule One investors, its the most practical way to determine what to pay for a stock. Determining the cash that will accrue to the owner of the business is the key to knowing value.
In IMAX's case, we have an interesting company with some very real protection against competition. No one else is doing what they are doing. (Maybe because IMAX isn't making any money.)
But IMAX has issues. We look hard at management to determine whether they are sitting on the same side of the table with us investors. In IMAX's case, they are not even though the two guys who really built the company have a lot of stock in it. What they also have is a golden parachute. One of them already bailed and took a $14 million payday. The other one is standing in the door and about to jump. Not that I blame them. They built this thing the hard way and it has to be frustrating to have a year like 2010 where Avatar brought in the cash like never before and then see it all disappear in 2011. In the last six months they made $0.01 down from $0.60 per share the same period last year. With a track record of earnings losses that stretches back a decade, what sort of projection can we make about the future?
The deals they are cutting today are revenue sharing deals and IMAX warns in its 10Q that these deals will depend on picking good movies to work out well. Which means they are becoming more of a movie studio picking a slate of movies each year than an exhibitor of their own stuff. Maybe that's the way out of these fruitless woods but how can we know? What we can know is that the public companies that make movies are a bit up and down and very difficult to value even when they are doing well.
So while I love IMAX movies, agree it has at least a part of a Moat, its missing a key ingredient - the ability to set prices with good profit margins. Apparently they don't have the pricing power to make a profit. No profit, no cash. No cash, no real value to buy. So no deal.
Now go play.
