Mississauga, Canada-based entertainment technology company IMAX Corporation (IMAX - Get Rating) offers cinematic solutions that comprise proprietary software, theater architecture, intellectual property, and specialized equipment worldwide. IMAX shares have slumped 5.4% in price over the past year and 2.9% year-to-date. The stock has declined 11.5% over the past month to close its last trading session at $17.32.

IMAX recently saw its best fourth quarter at the global box office since 2017, grossing $277 million, up 15% from 2019.  Its “Spider Man: No Way Home” led the way with $83.1 million at the box office, which crushed estimates in its debut. Furthermore, the company is gearing up for at least 10 releases among the 2022 movies filmed for IMAX or include IMAX-exclusive expanded aspect ratio. IMAX CEO Richard Gelfond does not expect COVID-19 disruptions to “cause a big negative for the year.”

However, increasing players in the streaming business are expected to weigh on the traditional movie industry, making it difficult for the traditional box office to rebound to its pre-pandemic level. Also, the hybrid environment has made it difficult for experts to compare streaming views to movie tickets to measure success. “We don’t have very much insight into streaming numbers and, even what we do see, it’s not remotely comparable. So, in terms of how these movies are profiting or not profiting, the water is very muddy right there,” according to Shawn Robbins, chief analyst at Box Office Pro.

Here is what could shape IMAX’s performance in the near term:

Poor Profitability

IMAX’s 39.41% and 8.05% respective gross profit and levered FCF margins are 23.7% and 27.1% lower than the industry 51.66% and 11.04% industry averages. Also, its EBIT and net income margin of negative 21.69% and 26.53%, respectively, are substantially lower than the 10.77% and 6.53% industry averages.

Moreover, IMAX’s ROE, ROA, and ROTC of negative 14.59%, 6.16%, and 3.76%, respectively, compare with the 9.36%, 3.00%, and 4.42% industry averages.

Significant Improvement in its Last Reported Quarter

IMAX’s total revenues increased 51.9% year-over-year to $56.60 million in its fiscal third quarter, ended Sept. 30, 2021. Its gross margin rose 617.9% from its year-ago value to $27.49 million. Its adjusted net loss attributable to common shareholders came in at $5.03 million, indicating an increase of 88.7% year-over-year, while its adjusted net loss per share improved 89.3% year-over-year to $0.08. Also, its adjusted EBITDA margin was 26.3%, compared to its negative 0.8% year-ago value. In addition, its free cash flow stood at a negative $7.29 million, down from its negative $12.93 million prior-year quarter value.

Bleak Past Performance

The company’s revenues have declined at a 19.7% CAGR of 19.7% over the past three years and 12.3% over the past five years. Also, its levered FCF has decreased at 41.8% CAGR over the past three years.

In addition, its trailing-12-month net income and EPS came in negative $53.67 million and $0.92 respectively. Its EBITDA stood at a negative $4.58 million, while its operating income came in at a negative $43.87 million. Furthermore, trailing-12-month net operating cash flow came in at a negative $11.78 million.

Consensus Rating and Price Target Indicate Potential Upside

The three Wall Street analysts who rated IMAX have rated it Buy. The 12-month median price target of $28.00 indicates a 61.7% potential upside. The price targets range from a low of $27.00 to a high of $30.00.

POWR Ratings Reflect Uncertain Prospects

IMAX has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Momentum. This is justified because the stock is trading below its 50-day moving average.

IMAX has a D grade for Stability, which is in sync with its 1.56 beta.

Of the eight stocks in the Entertainment – Movies/Studios industry, IMAX is ranked #1.

Beyond what I have stated above, one can view IMAX’s grades for Quality, Growth, Value, and Sentiment here.

Bottom Line

IMAX is gradually rebounding from its pandemic-led losses. However, the popularity of OTT devices and services is here to stay. And although the company is diversifying into the streaming business with its ‘IMAX Enhanced,’ which is now available on streaming services, including Disney+, BRAVIA CORE, and more, its profit margins are low. So, I think it could be wise to wait for IMAX’s margins to improve before investing in the stock.

IMAX shares were unchanged in premarket trading Monday. Year-to-date, IMAX has declined -2.91%, versus a -5.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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