This article is a
summary of what I read online on Barron's and my own research. I thought this
was interesting to point to readers looking at small cap beaten down stocks..
- RealD – Current
price at $14.96
- Potential Upside by
Industry Estimates: $8 per share
- Market
Capitalization: $818M
- Cash: $24.89M; Total
debt: $25M
- Shares Outstanding: 55M
- Operating Margins: 22%; ROE:22%
- Sector: Technology; Industry:
Movie Production, Theaters
What does RLD do?
RealD, a technology outfit that specializes in 3D movies,
could finally be ready to give up its feast-or-famine existence as an
occasional Hollywood novelty for a meatier
long-term role. The Los Angeles
company, which supplies theatres with systems that enable their projectors to
play 3D movies, and sells the special glasses required, has enjoyed a good
lead-in to the arrival of summer blockbusters.
WHY RLD:
Led since 2003 by co-founder Michael Lewis, RLD went public at $16 in 2010
after the enormous success of the movie Avatar, then rose to a high of
$35 in May 2011. But then the stock slid all the way to $8 late last year, amid
fears that 3D was a fad. A failed deal to use RealD's technology in TV sets
heightened the worry. However, early reviews from Europe
for The Amazing Spider -Man in 3D have been positive, and new
licensing deals with a Chinese theater operator should help the company's
expansion overseas. That comes on top of the spectacular success of another 3D
pic, The Avengers, in early May. The recent news has helped push RealD
shares to $13.52 and according to some industry estimates the stock has the
potential to top $20 in the next year. Summer blockbuster candidates like
Spider-Man and Madagascar
3 could add to 3D's momentum from big-budget movies such as Prometheus.
Potential Catalysts:
Lateral
Growth:
The popularity of the recent 3D movies and the technology's new expansion
beyond the action-adventure genre to drama are positive signs of maturity.
As production costs fall, more directors are likely to
embrace 3D. RLD's systems have been installed on about 20,600 screens, 12,000
in the U.S.,
and 8,600 overseas. The company invests $10,000 to put in each unit. In turn,
the theater pays the company a fee of 50 cents for each 3D movie ticket it
sells. It's a nice swap: Theaters charge as much as $5 more for a 3D ticket. To
recoup its investment, RealD needs a theater to sell roughly 20,000 tickets per
screen. According to some analyst conservative estimates, a theatre will sell
an average of 17,000 tickets per screen in the first year, with a modest
decline per screen each year as more 3D screens go into service. That suggests
the system pays for itself in about 16 months.
According
to industry estimates each theater screen might bring RLD $37,000 over eight
years. Yet he says the stock trades as if the take might be only $21,000,
offering a significant discount for investors.
Emerging Markets:
Biggest opportunity, however, lies abroad where big-budget action pictures
require little translation. Already, the 3D splits—the proportion of a movie's
box office sales generated in 3D—is about 49% domestic and 51% international.
For the five years ending 2015, RealD's international growth rate might average
19.7%, versus 8.8% for domestic.
RLD's
international expansion has "a lot of legroom, a lot of runway" for
growth. RLD has less than 10% of the Chinese market In the past 18 months, it's
signed up 2,000 screens in China,
including a big deal this month, and has installed 650 of them. China is adding
3,000 screens per year and had 10,500 screens at the end of 2011. By contrast,
the U.S.
has 40,000 screens. But RealD is also taking share from rivals, including Dolby Laboratories
(DBL); other competitors include
IMAX (IMAX) and MasterImage.
Patents:
RLD might enjoy a bright spot is the consumer-electronics business. In 2011,
Samsung decided not to make flat-screen panels using 3D technology. Yet 3D is
surely coming back. RealD has 300 patents, which it could license to companies
making 3D TVs.
Fundamentals:
Earnings might fall in 2012 to $26.1m, or 47cents a share, from $36.9m, or
65cents a share, as RealD invests abroad, puts more money into R&D and
fixes bumps at its 3D eyewear unit. Cash flow from theatrical licensing could
rise to $141mn in 2015, nearly double what it was in 2010, as capital spending
on U.S.
theaters wanes and licensing fees roll in. RealD trades at about 12x cash flow,
compared to 25 times for IMAX . RealD could fetch $21 a share from any
acquirer—about 50% above current levels.
