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IMAX Stock: Probably Not the Best Investment Opportunity
Stock Analysis & Ideas

IMAX Stock: Probably Not the Best Investment Opportunity

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Although analysts have a Strong Buy rating on IMAX stock, I believe that the company’s decreasing efficiency and increasing risk factors are not the ideal mix investors should be looking for. This is especially true if a recession is on the way.

IMAX Corporation (IMAX) has seen its business negatively impacted over the past decade as efficiency has deteriorated while risk factors have increased. While analysts have a positive outlook for the company, I believe there are better options to invest in.

IMAX is an entertainment technology company that engages in the business of motion picture technologies and presentations.

Operating Efficiency Has Been Declining

IMAX needs to hold onto a lot of inventory in order to keep its business running. Therefore, the speed at which it can move inventory and convert it into cash is very important in predicting its success. To measure its efficiency, I will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

IMAX’s cash conversion cycle is 293 days, meaning it takes the company 293 days for it to convert its inventory into cash. This number has steadily trended upwards in the past several years, indicating that the company’s efficiency has deteriorated. For example, its cash conversion cycle was just 79 days in Fiscal 2012.

In addition to the cash conversion cycle, let’s also take a look at IMAX’s gross margin trend. Ideally, I would like to see a company’s gross margin expand each year. This is, of course, unless its gross margin is already very high, in which case it is acceptable for it to remain flat.

In IMAX’s case, gross margin has decreased in the past 10 years. This is not ideal because it does not allow the company the opportunity to increase free cash flow or reinvest a larger percentage of revenue into growth initiatives.

Risks Have Been Increasing

To measure IMAX’s risk, I will first check if financial leverage is an issue. I do this by looking at its debt-to-EBITDA ratio. Currently, this number stands at 5.2x.

Overall, I don’t believe that debt is currently a material risk for the company because its interest coverage ratio is 1.3x (calculated as free cash flow divided by interest expense).

In other words, it can cover its annual interest expenses 1.3x over using its operating income. However, it doesn’t give the company much room for error, meaning that it could find itself in a difficult position in a recession.

In addition, there are other risks associated with the company. According to Tipranks’ Risk Analysis tool, IMAX disclosed 33 risks in its most recent earnings report. The highest amount of risk came from the Finance & Corporate category.

The total number of risks has increased over time, as shown in the picture below.

Analysts Have a Favorable View of IMAX

IMAX has a Strong Buy consensus rating based on four Buys and one Hold assigned in the past three months. The average IMAX price target of $21.75 implies 34.2% upside potential.

Should Investors Consider IMAX Stock for Their Portfolios?

Although analysts have a Strong Buy rating, I believe that the company’s decreasing efficiency and increasing risk factors are not the ideal mix investors should be looking for. This is especially true if a recession is on the way.

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