Investors, while designing their portfolio of stocks, solely aim at raking in handsome returns. To attain their objective, they add well-performing stocks to their respective portfolios and get rid of underperformers.
One such stock that investors would do well to avoid for the time being is the Mississauga, Canada based entertainment technology company IMAX Corporation
IMAX. We’ll tell you why. Multiple Headwinds Hurting the Stock
IMAX has had a disappointing run at the box office over the past few months. Soft box-office revenues hurt the company’s fourth-quarter 2016 results as well. This along with higher marketing costs were primarily responsible for both the top and the bottom line contracting on a year-over-year basis in the fourth quarter of 2016. Gross margin also declined due to the above headwinds.
In the fourth quarter, revenues from IMAX Theater Systems declined 8.4% year over year, mainly due to weak revenues from sales and sales-type leases of theaters. Also, revenues from the film segment declined 6.3%. Adverse foreign currency movements are also a challenge for the company.
Certainly Not a Broker Favorite
Given the challenges faced by the company, it is natural that the stock is not a favorite of brokers right now. The Zacks Consensus Estimate for the first quarter of 2017 has gone down 50% to 4 cents over the last month, due to multiple downward revisions. Even for full-year 2017, the Zacks Consensus Estimate is down 5% to 77 cents.
Given the wealth of information at the disposal of brokers, it is in the best interests of investors to be guided by broker advice and the direction of their estimate revisions. The direction of estimate revisions serves as an important pointer when it comes to the price of a stock.
In fact, the stock has underperformed the Zacks categorized Movie/TV Production/Distribution industry over the last three months. While the IMAX stock has gained 4.8% in the period, the industry has advanced 6%.
Valuation & Style Score
In terms of enterprise value (EV) to EBITDA ratio, IMAX appears to be overvalued compared with the market at large. The company currently has a trailing 12-month EV/EBITDA ratio of 22.85 compared with the S&P 500's 10.62. In fact, the current level compares unfavorably with what the stock itself saw in the last two years. The ratio is higher than the average level of 22.2 and almost near its high of 31.79 over this period.
Also IMAX’s trailing 12-month return on equity (ROE) undercuts its growth potential. Not only has the company’s ROE of 4% decreased gradually over last nine months, it compares unfavorably with ROE of 20.35% for the Zacks categorized above industry. This reflects the fact that it is less efficient in using shareholders’ funds.
Additionally, the stock has an unattractive
VGM Score of ‘F’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. In Conclusion
Taking into account the above-mentioned headwinds and the unfavorable readings, we advise investors to get rid of the stock at the moment. The Zacks Rank # 5 (Strong Sell) carried by the stock suggests the same.
Stocks to Consider
With IMAX disappointing, investors can look at some better-ranked stocks like Gray Television
GTN, Pool Corporation ( POOL Quick Quote POOL - Free Report) and Black Diamond, Inc. BDE in the broader Consumer Discretionary sector. All three stocks carry a Zacks Rank #1 (Strong Buy). You can see . the complete list of today’s Zacks #1 Rank stocks here
Gray Television has an earnings growth expectation of 6.5% over the next 3–5 years.
Pool Corporation has an impressive history with respect to earnings per share, having outshined the Zacks Consensus Estimate in each of the last four quarters by an average of 19.93%. The company’s expected earnings growth rate for 3–5 years is 15%.
Black Diamond has an earnings growth expectation of 12.5% over the next 3–5 years.
The Best Place to Start Your Stock Search Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>