How to surf the 3D movie wave?

Analysts advise buying into infrastructure companies like RealD for now,rather than bet on box office fortunes or the theater chains sinking billions in upgrading to carry 3D.

The 3D market is an embryonic growth market right now. If you get in early with a company that dominates the segment,you could do well,said Francis Gaskins,president of IPOdesktop.com.

Analysts spy hidden gems among smaller hardware and services vendors such as RealD. They favored companies that focus on hardware to aid the upgrade or film-conversion to 3D,or provide technology to screen it.

Media Valuation Partners principal Larry Gerbrandt likened the boom to high-definition TV,when the likes of Technicolor SA8217;s Grass Valley 8212; which made broadcast switches needed for the transition 8212; became early beneficiaries.

It8217;s more of an infrastructure play. You can8217;t point to any one company and say they8217;re going to be 8216;the8217; 3D play,he said. It8217;s one of these things where,over time,the whole infrastructure gets upgraded to 3D.

The 3D film business has mushroomed since Avatar became the highest-grossing movie of all time. Hollywood is cramming its release schedule with high-profile films like Toy Story 3. And theaters are scrambling to upgrade screens for 3D 8212; an estimated 3 billion exercise in North America alone.

The question is where to invest.

Marla Backer,analyst with Hudson Square Research,likes Ballantyne Strong Inc 8212; which prepares theaters for digital projection. That8217;s despite the Omaha,Nebraska,company8217;s stock price more than tripling to 7.50 from 2.20 in the past year 8212; to a pricey 29 times estimated 2010 earnings.

Carmike Cinemas Inc,a small theater chain,has a greater proportion of 3D screens than larger competitors 8212; about 500 out of 2,200 8212; and would thus be a disproportionate beneficiary of the 3D craze.

And she likes IMAX Corp,with its seven-storey screens,as a popular showcase for such movies.

CHINKS IN THE ARMOR

Less certain is whether big-name theater chains and studios actually make money,longer-term,off this emerging technology.

Exhibitors like Regal Entertainment have charged up to 5 on top of a standard ticket for 3D films. But some analysts suggest 3D is already showing signs of weakness.

BTIG Research analyst Richard Greenfield said box office revenue from 3D screenings is already declining. Walt Disney Co8217;s Toy Story 3 made 60 percent of its opening weekend gross from 3D,compared with 70 percent for Alice In Wonderland in March.

With the economy still recovering,we worry that movie exhibitors8217; view of consumer demand for 3D is disconnected from reality,he wrote.

Infrastructure may be a safer bet. Of some 130,000 screens globally,only 10,000 are 3D enabled. More than 5,000 theaters carry RealD 3D equipment and it said it has deals to convert another 5,000.

If RealD8217;s IPO take-up is strong,that might encourage others. Some are already plugging rivals such as X6D Limited,which sells under the Xpand brand,and Burbank,California-based MasterImage 3D.

RealD is the biggest by far in the U.S.,but I8217;d say MasterImage and Xpand will give RealD a run on the global business and will make inroads in the market domestically,said Scott Hettrick,editor of 3DHollywood.net.

RealD competes with audio equipment maker Dolby Laboratories Inc,which also sells 3D projection systems for theaters. Eric Cohen,corporate development vice president for Dolby,told a tech conference in New York that the company8217;s 3D systems are installed in about 3,300 theaters worldwide.

Burbank-based 3ality Digital is a maker of 3D cameras that industry sources also peg as an IPO candidate.

Business is growing at an extraordinary rate and we expect to be profitable in 2010,3ality CEO Sandy Climan said.

CONVERSION 8212; A BIG PLAY

Outfits that convert regular film and television shows into 3D may be another choice investment,analysts said. One expert pegged the market at 35 billion in the next five years.

Filming live-action 3D is costly and untested,apart from Avatar. Conversion is more of a known quantity and can fill a home entertainment market for 3D content. IMS Research expects over 200 million 3D-equipped TV sets to be shipped by 2015,and Hollywood cannot turn out new movies fast enough.

Conversion costs range from 50,000 to 150,000 a minute per film,depending on the visual challenges involved.

Prime Focus,a company started in India that has grown to 1,200 employees and become one of the largest players in 3D conversion,was stung by bad reviews for its job on this year8217;s Clash of the Titans. Its London share price fell 4.5 percent after the movie8217;s release,but has since bounced back.

Other major players in the arena are In-Three Inc,Legend 3D and Sony Corp8217;s Imageworks. All worked on Alice.

The conversion companies will do a big business over this next period,said Michael Peyser,a movie producer who teaches in the University of Southern California school of cinema.

Rob Hummel,Prime Focus8217; post-production chief,said his phone is already ringing off the hook.

I want to get us so we never have to say no,Hummel said. We tell them,8217;You better book us soon because if you don8217;t book us,someone else will.8217;