There are certain times as an option trader when you stumble upon a stock that looks like it could be in the early stages of making some pretty significant moves higher. However, the options don't look as attractive as the stock does for a number of reasons. First off, if a stock is trading for under $10 a share the options will be limited as far as "strike prices" and pinpointing the time frame on which options could become profitable becomes even trickier. One such stock that has caught me in this quandary is IMAX (IMAX, $6.47, up $0.12).
We've all heard of IMAX and if you have ever been to an IMAX theater they are jaw-dropping. With the movie business struggling to get consumers into its theaters, IMAX is taking the approach that bigger is better. Just how big are IMAX's screens? Let's just say that some can stretch as much as eight stories high. Phenomenal. The company also plans to change the technology currently involved by moving to digital projection systems that will eliminate the need for film prints. These two factors combined with some of the deals IMAX has in the works could certainly lead to a higher stock price.
The stock got my attention on December 7th when it jumped over 70% from $4.64 to a high of $7.94 after the company announced a deal with AMC to transform 100 multiplex screens throughout the chain into new IMAX digital projection systems. According to the agreement, half of the screens will begin rolling out sometime this July, with the rest of the screens going up over the next couple of years. The move allows the company to build upon its current base of IMAX screens while also validating the company's push to go digital. At the time I didn't feel the need to "chase" IMAX higher and decided to add it to my Watch List.
Since then I've learned IMAX currently has close to 300 screens in 40 countries and the 100 screen deal with AMC was the start of a backlog of pending orders. On Monday, the company also announced another 35 screen deal that will put theaters in Central and South America as well as the Caribbean. The backlog combined with surging sales represent a dangerous combination.
IMAX generated $145 million in revenues for Hollywood releases in 2007, which was 50+% higher than the $93 million the company grossed during 2006. Most of the movies shown are the expected blockbusters of course with five of the ten highest grossing motion pictures of 2007 released in the IMAX format. This is smart on IMAX's part because that's what most of us go to the movies for anyway. Right? The "other" movies will always play in the theaters but we all know we can watch them at home on DVD at our convenience.
But here's the one thing that was just amazing to me. The first live-action movie to be shot, produced, and screened exclusively with IMAX's 3D technology was
U2 3D. I grew up listening to
U2 and even saw a few of their shows. But the reviews that this film is getting set to the IMAX experience has me craving to go see it. In fact, I heard it was so real, that as the movie was playing someone actually stood up and was going to ask the person in front of them to sit down until they noticed it was part of the movie!
The thing that gets me with this company is its earnings history and that there were some accounting issues and legalities not so long ago. This was a $30 stock back in 1999 and has traded below $10 for the past seven years basically. However, management seems to have turned the ship around and it appears this stock could sail higher. There are some analysts that believe the deals IMAX has in the works could add up to $4.50 per share in earnings down the road based on the company's projections. This is where the problem lies.
The company announces earning this Friday before the market opens and I'm not quite sure what the earnings will do to the stock. Unfortunately, IMAX is spending money to make money with its joint ventures that involve costly system installations. IMAX pays for the installs with its screens and then shares the profits with the operators. This will attract even more partners down the road, but with just $18 million in cash on the company's balance sheet, IMAX could struggle juggling these issues.
Even if my assumptions were overly optimistic, I still think in this case that the options are extremely risky. Take for instance the March 7.50 calls (IMQCU) which are selling for 10 cents. The calls don't expire until March 21 but if IMAX fails to reach at least $7.60 a share by then you are buying worthless options no matter how cheap they are.
The September 7.50 calls (IMQIU) are selling for 75 cents and they don't expire for another six months. IMAX would have to be trading at $8.25 by the time the September calls expire for us to break even. I like this scenario a whole lot more than the March calls but still have my reservations. If you have some "lottery" money you wanted to waste then yes, maybe the September 7.50 calls sound like a good ticket. I'm not much of a lottery player. That's why in this case, the stock is looking like the better deal to me if you believe it trades higher from here.
Hit me up if you enjoyed the article or made any money!
