Knowledge Leader Spotlight: IMAX Corp by Eric Bush, CFA – Gavekal Capital Blog
When one thinks of innovative companies, the movie and entertainment sub-industry isn’t the first group that comes to mind. However, as with most sub-industries in the global stock market, if you know what you are looking for you can find innovative companies in even an unlike sub-industry.
Note: All data cited is intangible-adjusted
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IMAX corp (ticker: IMAX) is a Canadian entertainment technology company that trades on the NYSE. IMAX stands out among its competitors as the only company that invests in R&D (a healthy 3.4% of sales) and it is the third largest investor in firm specific resources as a percentage of sales. Sales have been growing at a very robust rate (28.7% year-over-year – nearly 3x as fast as its closest competitor) so IMAX has also been heavily investing in traditional capex as well.
As with most Knowledge Leaders, IMAX’s commitment to innovation through investment in intangibles produces margins and financial liquidity that its competitors cannot match. IMAX has the highest gross margins in its sub-industry by nearly 12% percentage points. It’s gross margin is 58.2% compared to the sub-industry average of 42%. It has the highest EBITDA margin as well. It’s EBITDA margin is 49% with its closest competitor, Viacom, producing an EBITDA margin of 39.3%. IMAX’s balance sheet is the envy of its competitors. Over 39% of its capital is in cash and it has -36% net debt. As with most Knowledge Leaders, having cash on hand is important since the vast majority of intangible investments are internally financed instead of using external sources such as bank loans. Finally, IMAX is able to turn its innovative capital stock into reliable cash flow. IMAX has a 34.5% operating cash flow margin, the highest in its sub-industry, and a 9.5% free cash flow margin.
IMAX has been churning out impressive growth rates over the past 10-years. It has managed to grow its cash flow by over 23%, annually, over the past 10-years. It’s book value has grown by a remarkable 45.3% annually over this time as well. Its EPS growth has not been as robust as the growth in cash flow and book value, however, it has still grown by over 13% annually for a decade which is the fourth highest in the sub-industry.
In an absolute sense, IMAX’s valuation multiples seem very high. It is currently trading at 16.8x cash flow, 5.8x sales, and 2.8x book value. However, current levels are well below that average multiples IMAX has traded at over the past 10-years. IMAX is trading at a 70% discount to its average P/B multiple and a 30% discount to its average P/CF multiple.
From a technical perspective, the downtrend that IMAX has been in since 2015 seems to have moderated. Previous levels of resistance that existed from 2012-2014 now look like it will provide support for IMAX. We would expect to see IMAX challenge resistance levels around line B in the chart below. If resistance gives way, IMAX could be set for a multi-year relative performance uptrend that could make current valuation multiples look cheap.