Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does IMAX (IMAX 0.23%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell IMAX's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's look at IMAX's key statistics:
IMAX Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
28.6% |
Fail |
|
Improving profit margin |
(26.8%) |
Fail |
|
Free cash flow growth > Net income growth |
4.7% vs. (5.9%) |
Pass |
|
Improving EPS |
(10.3%) |
Fail |
|
Stock growth (+ 15%) < EPS growth |
93.8% vs. (10.3%) |
Fail |
Source: YCharts.
*Period begins at end of Q2 2010.
IMAX Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(82.4%) |
Fail |
|
Declining debt to equity |
(76.1%) |
Pass |
Source: YCharts.
*Period begins at end of Q2 2010.
How we got here and where we're going
IMAX looks like a dud today, as it's mustered only two out of seven possible passing grades. However, there may be some hope -- the company's revenue growth is close to passing, and an uptick in net income would do much to bring the company's fundamentals back in line with its share-price growth. But can IMAX put on a blockbuster showing over the next few quarters to justify recent investor optimism? Let's dig a little deeper to find out.
IMAX has been aggressively expanding its geographical presence in both domestic and international markets. At the beginning of this year, IMAX inked an agreement with Russia's Kronverk Cinema to launch three new IMAX theatre systems in Russia, which will give it a presence in all of the top six cinema chains in the country. Additionally, IMAX has also partnered with Indonesian exhibitor Cinema 21 to open eight IMAX theaters across that country, the most populous in Southeast Asia. These partnerships will be, at the very least, a good foot in the door to valuable overseas markets.
IMAX has also partnered with Ecuadorean cinema company Supercines to install two IMAX theatres in Guayaquil, the most populous city in Ecuador. My Foolish colleague Rich Duprey also notes that Regal Entertainment (NYSE: RGC) recently entered into a partnership with IMAX to enhance the premium movie experience for 123 of its more than 7,300 screens -- that leaves a whole lot of potential converts for the future.
Fool contributor Travis Hoium notes that small and big screens have both been struggling to capitalize on 3-D technology, which has yet to catch on with consumers. IMAX and RealD (NYSE: RLD) have both been hurt by this fallout, but in the long run, it might be to IMAX's advantage that the big-screen experience refocus around its high-end projection. However, RealD has launched a new big-screen concept called LUXE, which may push back against IMAX's dominance of high-end screenings. On the other hand, IMAX has been riding high in China thanks to impressive growth in its deployed screens -- there are 113 IMAX-enabled theaters in China today, and another 117 are under construction.
Putting the pieces together
Today, IMAX has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
