3 Things To Consider Before Investing In IMAX

Even though they make up the largest demographic of cinema-goers at nearly 30%, there has been a worrying decline in the number of 12 - 24-year-olds going to theatres in the U.S. over the past decade, down from 34% to 24%.

One company that appears to be going against the grain is IMAX (NYSE: IMAX), which reported strong earnings at its last report back in October 2019, including revenue and gross profit growth of 5.2% and 19% respectively.

Despite this, it can't fight the rising tide forever, which shows in its stock performance. If you had bought IMAX stock in 2017, you would be down more than 40%. With that in mind, here are 3 key figures to consider if you're thinking about investing in IMAX.

1. It's not as risky as you'd think

Famous fund manager Li Lu once said, "The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital." With that in mind, it's worth noting that IMAX does have quite a bit of debt on its balance sheet, but it shouldn't be a concern for shareholders.

IMAX has certainly been a volatile stock over the past three months, with December highs of $22.07 per share and January lows of $16.54. However, for a better indicator of the company's financial situation, we had better look at its balance sheet.

As of September 2019, IMAX had $18.1 million of debt, an increase of $17.6 million the year before. But it also has $102.5 million in cash to offset that, meaning it has $84.4 million net cash. On top of this, the company boasts liquid assets that are worth $9.65 million more than its total liabilities.

These figures make for a pretty solid looking balance sheet, as it shows that the company is in a good position to manage its debt safely. 

2. The 'Big Mouse' factor

Many of the biggest cinema stocks such as AMC Entertainment (NYSE: AMC) and Cinemark Holdings (NYSE: CNK) took a hit over the holiday period following a disappointing opening for Disney's (NYSE: DIS) latest 'Star Wars' installment. IMAX however, benefited from one of its strongest years thanks to Disney's $12 billion box-office take.

In the middle of the year, the company was on track for its best box-office draw ever, bucking the trend at the time that saw the overall domestic take down nearly 10%. Back in 2014, IMAX signed an important deal with Disney to bring the House of Mouse's creations to life on the big screen, using IMAX cameras and airing movies in IMAX cinemas. The deal has proved fruitful, being renewed again in 2017. In 2019, Disney owned Marvel's "Avengers: Endgame" shattered opening-weekend records for IMAX, with $91.5 million, merely a month after Marvel's "Captain Marvel" brought in $36 million.

Disney's deal with IMAX ended in 2019, but it is likely that another will be penned soon given the massive success of Disney last year. Such deals are key to IMAX's revenue stream, and as the leading cinema tech provider, it can keep luring in top clients. 

3. IMAX's return on equity

Despite revenue growth, an expanding bottom line -- net income grew 45% YoY in the Q3 2019 -- and success in China which saw IMAX's box office grow 27% last year, IMAX's return on equity has not been ideal. One of the best ways to measure this is by comparing it to the industry average.

As seen in the above image, IMAX's return on equity of 6% is well below the industry average of 14%. It is an important metric to look at moving forward, especially if it begins to decline further. However, if the company continues to manage its debts well as seen above, and build new partnerships such as the one with Disney, it could see improvement.

Overall, the company is in good shape, despite the threat of Netflix (NASDAQ: NFLX) and the other 2 billion streaming companies that have emerged in the past year. IMAX's earnings call on Wednesday will give a clearer indication as to the shape of the company, which had several blockbusters in the final quarter of the year, including "Frozen II" and "Ford v Ferrari".

With any luck, this week's earnings can echo the sentiment of CEO Rich Gelfond from the company's last call: "We are on track for a strong fourth quarter to top off our record-breaking year."

IMAX will report its earnings after close on Wednesday, 19 February, with a consensus earnings per share forecast of $0.23.

MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in IMAX. Read our full disclosure policy here.