IMAX Focuses On the Big Picture; Second-Banana E-Trade Splits Vote

IMAX (IMAX)

(Jim: Buy)

(Mike: Buy)

Jim: I’m assuming, Mike, that you’ve had the “IMAX experience”?

Mike: Certainly, Jim. As a family man and a connoisseur of kitsch, most recently I attended Walt Disney’s “Fantasia 2000” at an IMAX theater.

Jim: Kitsch?

Mike: Sure. “Fantasia” and “Fantasia 2000”? They’re the definition of kitsch, what with those baby centaurs and unicorns prancing around, those flying whales and whatnot. When it comes to the precious, Rod McKuen could take Disney’s correspondence course.

Jim: Um, I wasn’t referring to a particular movie, but to the production value of seeing it at IMAX.

Mike: Oh well. IMAX, of course, is a Canadian company that leases those huge-format screens to theaters to give viewers something special.

Jim: Right, some of the screens are eight stories high, and IMAX today has more than 210 of these screens worldwide.

Mike: In fact, you might think of IMAX as Cinerama for Gen X.

Jim: IMAX develops the whole format, which includes not only the cutting-edge projectors and screens, but also the cool sound systems that make the whole production work.

Mike: And IMAX’s task is to sell this process to actual film producers, who will opt to make movies for IMAX screens. Just lately IMAX has scored some big successes in that area.

Jim: Good point. Disney was the first big studio to sign on with IMAX, producing “Fantasia 2000” for the big, big screen. And the fact that “Fantasia 2000” is doing well signals that more big studios might follow Disney’s path to IMAX. That’s one big reason I’d buy this stock.

Mike: Tipping your hand early, which is fine, because I like the stock too.

Jim: Let’s face it: A lot of movies that IMAX has traditionally shown are basically the Discovery Channel on steroids--movies made by independent documentary producers. Don’t get me wrong--they were very compelling. But the Disney deal has changed things.

Mike: IMAX has even hinted that it’s got another studio lined up for a film to be released next year. And you’re right, the IMAX films to date have been largely designed to show off the process rather than to tell a good story. A little of that goes a long way, but now IMAX is poised to move closer to the mainstream of movie making. Yet there’s something even bigger coming that should benefit IMAX.

Jim: Are you referring to its recent acquisition?

Mike: You got it. IMAX bought Digital Projection International, which makes digital projectors. That’s important, because all signs point to Hollywood eventually going digital. Film--defined as a strip of celluloid through which light is projected onto a screen--is sooner or later going the way of the black-and-white TV screen.

Jim: With IMAX now poised to pounce on that.

Mike: Now, there are still technical and, especially, economic hurdles to overcome before your neighborhood gazilloplex goes all-digital. But certainly the industry sees this revolution coming. Digital projection of digitally shot movies will eventually become as common as music on digital CDs.

Jim: DPI already is selling its digital projectors to trade shows, big corporations and other organizations, and that will help accelerate IMAX’s overall sales growth. IMAX also is nicely profitable, and the stock is rather inexpensive, trading at about 16 times this year’s estimated per-share earnings.

Mike: The stock hasn’t done much over the last 12 months, but that will change as more studios sign up with IMAX and the DPI deal kicks in with the transition toward digital movie making.

Jim: But keep this in mind: IMAX’s stock has a solid long-term record. It has far outpaced the Standard & Poor’s 500 index over the last five years. By the way, I’m still not sure whether you liked “Fantasia 2000,” since you called it kitsch.

Mike: I never said all kitsch was bad, Jim. Let’s just say there’s good kitsch, and there’s bad kitsch.

E-Trade Group (EGRP)

(Jim: Don’t buy)

(Mike: Buy)

Mike: This company raises this question for me: How can you be so big in a business and still be a dwarf?

Jim: I assume you’re referring to the fact that E-Trade is the second-biggest online brokerage firm, but is still a distant second to Charles Schwab.

Mike: Exactly. It’s second in terms of the average daily share volume it handles, according to analysts at U.S. Bancorp Piper Jaffray. But it’s even further behind Schwab in terms of assets under management. Schwab has $417 billion and E-Trade has $62 billion. The point being that E-Trade is handling much smaller accounts; it’s the online broker for the small investor.

Jim: Now, that’s not a knock against E-Trade. This company, in fact, is something of a pioneer, both in terms of being one of the original online brokers and in terms of being an Internet-related stock that went public way back in 1996. Give E-Trade its due: Right now, it’s first among online brokers in overall customer service, as ranked by Gomez Advisors, which tracks such things.

Mike: And with the exception of the classic Stuart-and-Mr.-P TV ad spot from rival brokerage Ameritrade, E-Trade has the best commercials of any of them.

Jim: E-Trade is one of the biggest spenders on advertising among the more than 100 online brokers in existence. Besides its TV ads, just look at all those mailers you get offering you $75 to sign up.

Mike: Essentially, E-Trade offers you several free trades to suck you in.

Jim: Right. Now, E-Trade is only breaking even these days, and I think it should be doing better profit-wise given its size and history. And when I consider its stock, I get even more cautious. Frankly, I wouldn’t buy it.

Mike: When I look at the chart for this stock since Jan. 1, it looks almost exactly like the chart of the Nasdaq composite index.

Jim: You’ve just hit on my problem with E-Trade. Now I know E-Trade is trying to move into other areas of financial services besides stock trading, but to me it’s still almost a mirror image of whatever Nasdaq and the rest of the market are doing. That’s why E-Trade’s stock plunged 60% from late March to its recent low.

Mike: But if you think Nasdaq is going to resurge, as we do, why wouldn’t E-Trade surge with it?

Jim: It has rebounded. But history notwithstanding, I’m not confident E-Trade will come back in lock-step with the market.

Mike: I’ll slice this bologna even thinner. It’s not only Nasdaq’s drop in value that has hurt E-Trade this year, it’s that trading volume on Nasdaq also has shrunk, which means the online brokers’ commissions are going down. But a healthy rally should get volume picking up again, another plus for E-Trade.

Jim: Now look, we both expect the value and volume on Nasdaq to rebound. But I suspect even E-Trade knows it can’t count on its success rising in tandem with the market, which is why it’s branching out.

Mike: Right, it has moved into online banking, financial planning and the like.

Jim: Swell, and I don’t blame them. Who wouldn’t want all that cash under management that’s now at places like Schwab or Merrill Lynch or Goldman Sachs. But to me, E-Trade for some time will remain a one-trick pony in the eyes of investors--as an online brokerage.

Mike: To paraphrase Richard Nixon, let me say this about that: No question this downturn in the market’s trading volume will be short-lived, and if you look at how investors boosted their cash reserves during the market’s recent slide you can see that we’re on the edge of another good move up in the market.

Jim: So you like this stock?

Mike: Not forever, but I think it’s about to pick up along with everything else. And although I agree with you that, to many, E-Trade remains one-dimensional, I think a lot of companies out there look at its 2.5 million or so accounts and say we’d like to have those.

Jim: You see E-Trade as a takeover target?

Mike: Absolutely. Advertising to attract new accounts keeps getting more expensive, so why not drill for them on Wall Street? And there’s E-Trade, with its 2.5 million Internet-savvy and click-happy investors.

Jim: Well, it goes without saying that whenever we argue against a stock, a takeover of that company automatically makes us wrong because the buyer almost always pays a premium over the target’s market price.

Mike: So what’s your point? You pays your money and you takes your chance.

Jim: My point is, setting aside the prospect of a takeover, I don’t see E-Trade performing even as well as the market. Don’t get me wrong: E-Trade’s customer-service rankings and its overall size speak for themselves. It will be a survivor in this business.

Mike: Whether it gets bought or not.

Jim: Either way.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at the Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).