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Elevator Pitch
My Buy investment rating for IMAX Corporation’s (NYSE:NYSE:NYSE:IMAX) stock stays unchanged.
In my earlier June 21, 2022 update for IMAX Corporation, I wrote about the “multiple tailwinds” for the stock such as box office recovery, the return of theatrical windows, and a new growth engine in the form of live events.
I offer my thoughts on recent developments for IMAX Corporation in this current article, which reinforce my Bullish view of the company’s shares. IMAX has expanded the company’s share repurchase program recently, and this is the right time for IMAX to do more buybacks as its valuation multiples are low as compared to historical averages. Separately, IMAX Corporation’s recent acquisition helps the company to build a new revenue stream which is a good thing in terms of diversification. After reviewing IMAX’s recent events and news flow, I still think that IMAX Corporation is deserving of a Buy rating.
Increase In IMAX Share Repurchase Authorization
Last month, IMAX Corporation announced that it was expanding the company’s share buyback program by doubling its share repurchase authorization from $200 million previously to $400 million now.
IMAX currently has the capacity to buy back $225 million worth of shares, which comprises of the new $200 million share buyback authorization and another $25 million that comes from its earlier July 2017 share repurchase authorization. This means that IMAX Corporation can repurchase as much as 28% of the company’s shares between now and the middle of 2023.
Notably, the company has already spent $175 million on share buybacks between 2017 and 2022, which is equivalent to roughly 15% of its shares outstanding. In other words, IMAX Corporation is in a position to accelerate its pace of share repurchases in the coming months, assuming that it executes on a large part of its share buyback authorization by June 2023.
It is important to understand why IMAX Corporation is buying back its own shares in such an aggressive manner. At the company’s most recent Q2 2022 earnings briefing in late-July 2022, IMAX emphasized that “we intend to continue to be opportunistic in repurchasing shares when we view our stock price as disconnected from the underlying fundamentals of the business.” Specifically, IMAX Corporation referred to its average share buyback price of $15.92 for Q2 2022 as “what we view as an undervalued stock price.”
IMAX Corporation’s shares last closed at $14.12 as of September 30, 2022, which is -11% lower than the company’s average share repurchase price for the second quarter.
More significantly, IMAX’s current valuations aren’t demanding on an absolute and historical basis. According to S&P Capital IQ’s valuation data, the market values IMAX Corporation at consensus forward next twelve months’ EV/EBITDA and normalized P/E valuation multiples of 7.8 times and 16.2 times, respectively. In comparison, IMAX’s three-year mean forward EV/EBITDA and normalized P/E valuation multiples were considerably higher at 9.9 times and 23.1 times, respectively for three year-period between 2017 and 2019 prior to the COVID-19 outbreak.
In summary, IMAX’s shares are undervalued, and the company is doing the right thing by allocating more capital to share buybacks.
Acquisition Of Streaming Technology Business
Besides the increase in its share buyback authorization, another recent development for IMAX Corporation worth noting is the company’s recent M&A deal.
IMAX revealed on September 22, 2022 that the company has bought over SSIMWAVE Inc. In the announcement, IMAX Corporation described SSIMWAVE as a streaming technology company whose services “help streaming services assess video quality at scale, minimize quality drop-offs.” More critically, IMAX stressed that this recent M&A transaction is consistent with its “strategy to deliver the highest quality video images on any screen” and will help it to “drive new revenue across all video platforms.”
This isn’t IMAX Corporation’s first and only move to diversify away from movie theaters. Disney (DIS) highlights on its streaming service website that “Disney+ subscribers can stream selected movies in IMAX’s expanded aspect ratio” with a feature referred to as “IMAX Enhanced.” At the Bank of America’s (BAC) Media, Communications and Entertainment Conference on September 7, 2022, IMAX Corporation outlined its goal of “bringing the DMR (Digital Media Remastering) process and DMR quality” to “other (streaming) platforms (apart from Disney+)” with IMAX Enhanced.
IMAX Corporation’s valuations have derated significantly (as highlighted in the prior section) in the past few years, as investors were worried that movie theaters will no longer be relevant in the new age of streaming with the COVID-19 pandemic accelerating this process of disruption.
However, such concerns about the impact of the demise of movie theaters on IMAX Corporation’s future business outlook seem to be overblown. IMAX disclosed at the Goldman Sachs (GS) Communacopia + Technology Conference on September 14, 2022 that the company’s global-ex China box office has recovered to 90% of pre-pandemic levels in 1H 2022. China is an outlier, as the country has maintained its zero-COVID stance, while a majority of countries globally have already made significant progress in terms of re-opening.
Also, I believe that if and when IMAX Corporation starts to earn meaningful revenue outside of movie theaters from other sources such as streaming services, it will help to allay investors’ concerns about the sustainability of IMAX’s future top line and earnings. In that respect, IMAX Corporation’s recent M&A deal involving streaming technology business SSIMWAVE is significant, as it is expected to be one of the key drivers of the company’s revenue diversification efforts.
Concluding Thoughts
I continue to assign a Buy investment rating to IMAX Corporation’s shares. I have a favorable view of the company’s recent moves. IMAX is repurchasing its own shares which are undervalued; and it is also planning for the future by diversifying its revenue base.
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