Good News for Two Names
There is some positive news on model portfolio holdings China Direct (CDS) and Imax (IMAX) , and we wanted to update readers. We aren't taking any action in this Alert.
As we mentioned in an Alert from early Monday, China Direct reported earnings that exceeded forecasts. However, the company's conference call occurred after the close yesterday, during which management significantly raised its 2008 guidance.
Management's original forecasts called for revenue of $270 million and net income of $20 million. The new guidance for the year, which was updated last night, is $320 million in revenue and $24 million in net income. Management said that magnesium prices jumped 25% from last quarter to this quarter, and the average price per ton that contracts are locked in at is $2,600. However, the price of magnesium on the spot market is trading above $4,000 per ton.
China is the No. 1 magnesium producer in the world, and management believes that China Direct will produce 10% of the worldwide market by year-end. Management is also building up its infrastructure just to keep pace with demand, and based on the statistics we've noted above -- which also include higher margins -- it seems as if the company's new guidance for 2008 could be conservative.
Shares of China Direct were recently trading 3% higher at $7.70, and we maintain our Two rating as the stock is up more than 40% in two weeks.
Turning to Imax, the company announced that it will install its digital projection system in three Russian cities. Financial terms of this deal were not disclosed, and installations will take place between 2009 and 2011. Shares were recently trading higher at $7.15.
Imax continues to expand its brand in the U.S. and internationally. Also, the movie pipeline continues to grow as the Rolling Stones' concert film in 3D -- directed by film legend Martin Scorsese -- will open April 4. Thus far, the reviews have been very positive.
Looking at box office receipts for movie theater chains, they appear to be trending downward. This plays into the hands of Imax, given that sales of 3D movies are trending higher and theater chains are looking for new ways to improve the experience of moviegoers -- thus the reason behind the company's huge expansion of its digital projection system in various theaters over the past three months.
We believe Imax has a very favorable risk/reward for investors looking past the next 12 months and that the stock will eventually hit double digits. Despite our positive view, we maintain our Two rating as shares of Imax are up more than 40% since we initiated our model portfolio position less than five months ago.
Frank Curzio is a research associate at TheStreet.com.
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