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Why Shares of IMAX Are Trending Lower on Another Company's Dismal Q2

What happened

Shares of IMAX Corporation (NYSE: IMAX), a technology hardware and brand-licensing company with well-known branded theaters, are down 9% as of 11 a.m. EDT Wednesday, following AMC Entertainment's 25% plunge after the the movie theater holding company announced weak industry trends and a shocking preliminary second-quarter loss.

So what

The reason IMAX is following AMC lower is simple: The latter is the largest movie exhibition company in the U.S., Europe, and across the globe, with 1,000 theaters and 11,000 screens, and IMAX now generates most of its revenue by selling and leasing required equipment for remastering standard films into the IMAX format. So when a massive theater chain reports bad news, which is expected to continue into the third quarter, it's not a good development for IMAX, either.

What was so bad about AMC's second-quarter preview, you ask? Part of the issue was certainly the company's stunning bottom-line loss: AMC expects a second-quarter net loss between $178.5 million and $174.5 million, compared to earnings of $24 million during the prior-year period. In terms of earnings per share, that's a loss of between $1.36 and $1.34, a stark decline from last year's earnings per share of $0.24 during the corresponding quarter. Another factor is that industry box-office trends aren't looking positive currently. The North American industry box office declined roughly 3.3% during the second quarter from the prior-year period, with the U.S. industry posting an even worse 4.4% decline.

Now what

Image source: Getty Images.

These swings aren't unusual for IMAX -- it has in the past swung higher on a single movie title surprising at the box office. The truth is, investors aren't sure whether these industry box-office trends are temporary or a shift in consumer behavior away from theaters. One thing is certain: If industry trends are indeed changing, it will make IMAX's recent strategic move to develop its virtual reality products and entertainment, which the company is currently testing in Los Angeles, even more important to the company's ability to generate incremental revenue in the future.

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Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends IMAX. The Motley Fool has a disclosure policy.