Rating Update: Stock Rating F-Lowest (12/3/19)-Immersion Corp (IMMR).

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BUSINESS

Immersion Corporation creates, designs, develops, and licenses haptic technologies in North America, Europe, and Asia. Its technologies allow people to use their sense of touch when they engage with various digital products. The company offers TouchSense Lite and TouchSense Premium toolkits that enable original equipment manufacturers and their suppliers to add customized haptic technologies to their own branded devices and other products. It also provides TouchSense Software Development Kits, which consist of design tools, integration software, and effect libraries that allow for the design, encoding, and playback of tactile effects in mobile content, including games, ads, and video. In addition, the company offers TouchSense Force, which comprises design tools, APIs, reference designs, and firmware for the PC/Console gaming/virtual reality markets.
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INVESTMENT RATING

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With future capital returns forecasted to fall short of the cost of capital, IMMR is expected to be a Value Eraser.

Immersion has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Immersion has a slightly negative Power Rating of 33 and a poor Appreciation Score of 25, with the Lowest Value Trend Rating the result.

Immersion’s stock is selling well above targeted value. The current stock price of $6.58 compares to targeted value 12 months forward of $5.
Immersion’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
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Immersion has a Power Rating of 33. (IMMR’s slightly negative Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 33% of companies in the universe.)
Factors contributing to this slightly negative Power Rating include: the trend in IMMR’s earnings estimates has been unfavorable in recent months; and recent price action has been slightly unfavorable. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

Immersion’s financial strength is high. Financial strength rating is 77.
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Relative to the S&P 500 Composite, Immersion Corp has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that IMMR is normal risk. Relative weaknesses include: low historical profitability, and high earnings variability. Immersion’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. IMMR has unusually low market capitalization.

CURRENT SIGNALS

Immersion’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Immersion’s current technical position is very weak. The stock price is in a 6.8 month down move. The stock has declined 25.9% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Important negative changes in Immersion Corp (NASDAQ: IMMR) investment behavior have recently occurred: negative upside/downside volume developed.
Recent notable negative changes in fundamentals have affected Immersion Corp (NASDAQ: IMMR): the consensus estimate for December, 2020 decreased significantly, and significant quarterly earnings deceleration occurred.
The stock is currently rated F.
On 12/3/19, Immersion Corp (NASDAQ: IMMR) stock enjoyed a major increase of 148.4%, closing at $0.03. Trading volume in this advance was normal. Relative to the market the stock has been weak over the last nine months and has declined -6.9% during the last week.

CASH FLOW

In 2018, Immersion generated a very significant increase in cash of +$78.38 million (+168%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$53.88 million. Non-operating sources contributed +$1.71 million (+3% of EBITDA). Cash taxes consumed -$0.39 million (-1% of EBITDA). Re-investment in the business amounted to -$12.48 million (-23% of EBITDA). In 2018, debt investors had no impact on cash while equity investors supplied +$35.66 million (+66% of EBITDA).
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Immersion’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Immersion Corp Peer Group as well. (Since 2016 Non-operating Income, %EBITDA has experienced very sharp improvement.) In most years, Immersion was in the second quartile and top quartile. Currently, Immersion is at the upper quartile at +3% of EBITDA (+$1.71 million).

Immersion’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Immersion Corp Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Immersion was in the top quartile and lower quartile. Currently, Immersion is substantially above median at -1% of EBITDA (-$0.39 million).

Immersion’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Immersion Corp Peer Group. In most years, Immersion was in the lower quartile and top quartile. Currently, Immersion is above median at -23% of EBITDA (-$12.48 million).

Immersion’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Immersion Corp Peer Group as well. In most years, Immersion was in the second quartile and third quartile. Currently, Immersion is slightly above median at 0% of EBITDA ( $0.00 million).

Immersion’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Immersion Corp Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Immersion was in the top quartile and third quartile. Currently, Immersion is upper quartile at +66% of EBITDA (+$35.66 million).

Immersion’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Immersion Corp Peer Group. (Since 2016 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Immersion was in the top quartile and lower quartile. Currently, Immersion is upper quartile at +145% of EBITDA (+$78.38 million).
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Immersion’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Immersion Corp Peer Group. (Since 2014 Cash, %Revenue has experienced a sharp recovery.) In most years, Immersion was in the top quartile. Currently, Immersion is upper quartile at +113%.

PROFITABILITY

Immersion’s return on equity has eroded very significantly since 2013.
Immersion’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of Immersion’s assets rose over the full period 2009-2019: asset turnover has enjoyed a volatile overall uptrend.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Immersion’s return on equity is lower quartile (-28.6%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (-18.7%) reflecting asset turnover that is lower quartile (0.28X) and lower quartile pretax margin (-67.6%).
Tax “keep” rate (income tax management) is at the upper quartile (101.2%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is slightly above median (1.51X).

GROWTH RATES

There are no significant differences between Immersion’s longer term growth and growth in recent years.
Immersion’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 6.5% per year.

Total asset growth has been 2.6% per year.

Annual E.P.S. growth has been 23.2% per year.

Equity growth has been -1.1% per year.

Immersion’s consensus growth rate forecast (average of Wall Street analysts) is 17.5% — substantially above the average of the historical growth measures.
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Relative to the Immersion Corp Peer Group, Immersion’s historical growth measures are generally third quartile. E.P.S. growth (23.2%) has been at median. Total asset growth (2.6%) has been below median. Revenue growth (6.5%) has been slightly below median. Equity growth (-1.1%) has been substantially below median.

In contrast, consensus growth forecast (17.5%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, Immersion’s stock price performance has been volatile and significantly below market. Between February, 2009 and December, 2019, Immersion’s stock price rose +71%; relative to the market, this was a -59% loss. Significant price moves during the period: 1) June, 2018 – December, 2019: -57%; 2) December, 2017 – June, 2018: +119%; 3) July, 2015 – May, 2016: -53%; and 4) October, 2012 – May, 2013: +256%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -17.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -17.9% is below median relative to Immersion Corp Peer Group.

Current 5-year total return performance of -0.5% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -0.5% relative to S&P 500 Composite, Immersion’s total return performance is lower quartile relative to Immersion Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, IMMR’s overall valuation is high. The highest factor, the ratio of enterprise value/revenue, is at median. Price/equity ratio is below median. Ratio of enterprise value/assets is near the lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Immersion has no value gap compared to the median valuation. For IMMR to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 3.33X to 3.90X. If IMMR’s ratio of enterprise value/revenue were to rise to 3.90X, its stock price would be lower by $1 to $7.
For IMMR to hit lower quartile valuation relative to the Immersion Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.33X to 1.78X. If IMMR’s ratio of enterprise value/revenue were to fall to 1.78X, its stock price would decline by $-2 from the current level of $6.58.

VALUE TARGETS

With future capital returns forecasted to fall short of the cost of capital, IMMR is expected to be a Value Eraser.
Immersion’s current Price Target of $5 represents a -24% change from the current price of $6.58.
Immersion’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 25, the moderately low Power Rating of 33 contributes to an Value Trend Rating of F.
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Immersion’s current Price Target is $5 (-78% from the 2018 Target of $23 and -24% from the 12/03/19 price of $6.58). This dramatic fall in the Target is the result of a +48% increase in the equity base and a -85% decrease in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a very large positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
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PTR’s return on equity forecast is 4.4% — significantly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well below the 2013 peak of 14%.

PTR’s growth forecast is 39.0% — substantially above our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is significantly above the 2012 low of 3%.

PTR’s cost of equity forecast is 9.1% — slightly below recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2011 low of 4.0%.
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At Immersion’s current price of $6.58, investors are placing a negative value of $-1 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 15.0% per year, and a return on equity of 31.7% versus a cost of equity of 13.9%.
PTR’s 2020 Price Target of $5 is based on these forecasts and reflects an estimated value of existing assets of $-1 and a value of future investments of $6.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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