Note: This blog entry was originally published as a Special Reports update on 2/16/2010 and is now open to everyone. Marcus (MCS) has risen since this update was originally published and is now trading slightly above book value.
2009 was a record year for the U.S box office with moviegoers spending more than $10 billion ($10.585 billion to be precise) despite the Great Recession. James Cameron's epic Sci-Fi flick Avatar and 3D technology have given new life to movie theater chains and investors are looking at companies in this sector with renewed interest.
It should be noted that Avatar, which was released on December 18, 2009 managed to "only" generated $283.8 million in domestic box office receipts before the end of the year and that the biggest domestic earner of 2009 was actually the sequel to the Transformers movie, Transformers: Revenge of the Fallen, that managed to pull in $402.1 million on the domestic box office and over $800 million worldwide. The lifetime gross domestic receipts for Avatar currently stand at $667.61 million, surpassing Titanic's $600 million gross to become the biggest selling movie of all time (on an inflation adjusted basis, Gone With the Wind released in 1939 still kicks the wind out of Avatar).
In stark contrast 2009 was a terrible year for the lodging industry. Revenue Per Available Room or RevPAR in industry parlance, a key metric used to determine the financial performance of a property, fell in both 2008 and 2009 with both business and leisure travelers tightening their purse strings.
The good news is that RevPAR declines have moderated in recent months and now appear to be stabilizing at a number of companies in the lodging industry including Wyndham Worldwide (WYN), Starwood Hotels (HOT) - love that symbol - and Marriott International (MAR). Both Starwood and Marriott raised their outlooks for 2010 when they reported recently reported 2009 results. Wyndham Worldwide, the parent company of chains like Ramada, Howard Johnson and Wyndham amongst many others tripled its dividend from 4 cents to 12 cents.
These two trends reminded me of Marcus, a company I last wrote about in the October 2007 edition of SINLetter. Marcus owns and operates 668 movie screens in the Midwest. The company also owns 8 upscale hotel properties including the Four Points by Sheraton in downtown Chicago and manages an additional 11 properties. Marcus could in the short-term benefit from the Avatar effect and in the long run benefit from improvement in RevPAR in its lodging division.
In the fiscal second quarter ended November 2009, revenue from theater admissions and concessions was $41.29 million, more than twice the $20.43 million in revenue generated from rooms. However the gross margins in the lodging division are much higher than margins from the theater division. Since Avatar was released in December, the company should see a boost to revenue when it reports results for its fiscal third quarter ending this month.
Besides Avatar, the third quarter will also benefit from the $204 million that Sherlock Homes rung up since December, about $150 million in box office receipts from The Twilight Saga: New Moon since the close of the second quarter on November 26, 2009 and a strong showing from The Book of Eli in January.
The four key reasons I like Marcus at this point are,
- When compared to other movie theater companies like Regal Entertainment (RGC), Cinemark Holdings (CNK) and Carmike Cinemas (CKEC) that could benefit from Avatar and the move towards 3D, I prefer Marcus because it trades at a valuation that is comparable to its peers but at the same time its balance sheet has the least amount of leverage of the group.
- The company has been booking charges against an investment in Las Vegas called the Platinum Hotel & Spa that fell in value following the implosion of the real estate bubble and this has impacted reported earnings for a number of quarters. Marcus booked a $12.6 million impairment charge last quarter related to the remaining 16 owned condominium units in the Platinum Hotel & Spa. The company also took a one time $1.4 million charge last quarter related to a pension withdraw liability. This liability had to do with a multi-employer pension plan connected to Chicago projections union and the one time charge allowed Marcus to exit now and lock in their portion of the unfunded liability in this plan. The company reported a small loss in the second quarter on account of these two charges but since these charges should not weigh down earnings going forward, valuation metrics will begin to start looking attractive in the next few quarters.
- The company pays a dividend of 34 cents per share, which gives you a 3.1% yield while you wait for the stock to appreciate.
- Best of all the stock trades slightly below book value of $11.17. The good news is not just that the stock trades below book value but that the assets on its balance sheet including the theaters and especially the 8 company owned hotel properties are carried at cost and are probably worth significantly more at this point.
I will purchase 500 shares of Marcus for the SINLetter Special Reports portfolio and also for my personal portfolio after this post is published. The closing price of the day on 2/16/2010 will be used as the purchase price.
Disclosure: Author holds a long position in Marcus