Is IMAX's Stock Expensive or Cheap by the Numbers?

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Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap IMAX (NAS: IMAX) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

IMAX has a P/E ratio of 21.1 and an EV/FCF ratio of -31.2 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, IMAX has a P/E ratio of 147.7 and a five-year EV/FCF ratio of -491.2.

A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.

IMAX is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

IMAX21.1NM147.7NM
Regal Entertainment Group (NYS: RGC) 41.110.514.411.8
Cinemark Holdings (NYS: CNK) 14.812.129.716.6
Dolby Laboratories (NYS: DLB) 11.47.315.09.9

Source: S&P Capital IQ; NM = not meaningful due to losses.

Numerically, we've seen how IMAX's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, IMAX's net income margin has ranged from -32.1% to 26.7%. In that same time frame, unlevered free cash flow margin has ranged from -18.3% to 16.5%.

How do those figures compare with those of the company's peers? See for yourself:

anImage

Source: S&P Capital IQ; margin ranges are combined.

Additionally, over the last five years, IMAX has tallied up two years of positive earnings and two years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what IMAX and its peers have done over the past five years. Due to losses, IMAX's trailing growth isn't meaningful. Neither is Cinemark's:

anImage

Source: S&P Capital IQ; EPS growth shown.

And here's how they measure up with regard to the growth analysts expect over the next five years:

anImage

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of IMAX are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 21.1 P/E ratio and we see that its EV/FCF ratio and five-year ratios don't match the already moderately high P/E ratio.

Much of this is due to IMAX's growth trajectory and capital expenditure investments to fuel that growth (we can see it in sales, which have pretty much doubled in the last five years).

These are just the initial numbers, but my fellow analyst Travis Hoium sees opportunity in the stock. If you also find IMAX's numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

To see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio, click here.

At the time this article was published

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