The Razor's Edge

2-Year Price History

A Word Of Caution

While, we stand by our ratings methodology for long term value investors, sometimes smaller companies will be more volatile in terms of revenue, cash earnings, and other fundamental factors. Imax Corporation (IMAX) is such a stock. Because many micro-caps are lightly traded their stock price can fluctuate because of a single large trade. Also, there is less analyst coverage of such micro-caps and therefore less information from which to base our ratings.

Therefore, (and as always), check additional sources and available information regarding IMAX before making an investment decision.

Ockham's Rating

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IMAX Revenue

As a value investing shop, we are interested in seeing how IMAX's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 2.94x and the low end of the range at 1.06x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for IMAX of 0.77x is well below its normal historic Price to Sales levels. At a price of $2.90, IMAX is 62% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

IMAX Cash Earnings

Looking at IMAX specifically in their Cash Earnings capabilities, Ockham views IMAX as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from IMAX. For example, IMAX's Cash Earnings ratio per share has fluctuated between 17.90 and 46.29 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where IMAX is with respect to prior business periods.

So with IMAX's current price (latest close of $2.90) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, IMAX is 84% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with IMAX.

IMAX Dividends

When determining a company's future prospects for success, Ockham Research sees analysis of dividend payments as a key additional factor. Even though it isn't imperative for IMAX to shell out a dividend in order to receive a positive rating, it can be helpful to further our analysis. While we do like to see companies with healthy and growing dividends, it is not appropriate for all companies, especially those focused on growth. We regard IMAX as neutral in terms of dividends because they have no history of paying a dividend and continue to reinvest that money for growth purposes.