U.S. markets open in 5 hours 24 minutes
  • S&P Futures

    4,258.50
    +2.50 (+0.06%)
     
  • Dow Futures

    34,173.00
    +91.00 (+0.27%)
     
  • Nasdaq Futures

    14,360.75
    +6.50 (+0.05%)
     
  • Russell 2000 Futures

    2,332.90
    +1.70 (+0.07%)
     
  • Crude Oil

    73.47
    +0.17 (+0.23%)
     
  • Gold

    1,782.50
    +5.80 (+0.33%)
     
  • Silver

    26.25
    +0.20 (+0.79%)
     
  • EUR/USD

    1.1950
    +0.0016 (+0.13%)
     
  • 10-Yr Bond

    1.4870
    0.0000 (0.00%)
     
  • Vix

    16.02
    -0.30 (-1.84%)
     
  • GBP/USD

    1.3905
    -0.0016 (-0.12%)
     
  • USD/JPY

    110.7450
    -0.0900 (-0.08%)
     
  • BTC-USD

    34,109.86
    +1,252.51 (+3.81%)
     
  • CMC Crypto 200

    818.28
    +31.66 (+4.03%)
     
  • FTSE 100

    7,118.63
    +8.66 (+0.12%)
     
  • Nikkei 225

    29,066.18
    +190.95 (+0.66%)
     

An Intrinsic Calculation For IMAX Corporation (NYSE:IMAX) Suggests It's 25% Undervalued

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
  • Oops!
    Something went wrong.
    Please try again later.

In this article we are going to estimate the intrinsic value of IMAX Corporation (NYSE:IMAX) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for IMAX

Step by step through the calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$97.8m

-US$446.0k

US$73.9m

US$85.3m

US$97.1m

US$105.9m

US$113.2m

US$119.3m

US$124.6m

US$129.2m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Est @ 9%

Est @ 6.91%

Est @ 5.45%

Est @ 4.43%

Est @ 3.71%

Present Value ($, Millions) Discounted @ 7.9%

US$90.7

-US$0.4

US$58.8

US$62.9

US$66.4

US$67.1

US$66.5

US$65.0

US$62.9

US$60.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$600m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$129m× (1 + 2.0%) ÷ (7.9%– 2.0%) = US$2.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.3b÷ ( 1 + 7.9%)10= US$1.1b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$1.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$21.0, the company appears a touch undervalued at a 25% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at IMAX as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.9%, which is based on a levered beta of 1.120. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For IMAX, we've put together three important elements you should consider:

  1. Risks: To that end, you should learn about the 2 warning signs we've spotted with IMAX (including 1 which can't be ignored) .

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for IMAX's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.