Why This Hotel Stock Will Bounce On A Bigger Summer Box Office

| About: Marcus Corporation (MCS)

This year's movie box office has started off far better than last year, and close to the record-setting 2010. Blockbusters like "The Hunger Games" and "The Avengers" are still setting records both domestically and internationally. The first quarter of this year saw the total domestic box office hit $2,584,270,000, compared to 2011, which saw the first quarter come in at just $2,096,910,000.

When a film is a major success such as "The Avengers", investors will look at the studio, Disney (NYSE:DIS) or the distributor, Paramount (NYSE:VIA) for an investment opportunity. Often overlooked are the smaller exhibitors who show the movie.

Marcus (NYSE:MCS) is an interesting company. It runs both a chain of hotels and resorts in addition to a theater business. It has 20 hotels and resorts, and its theater business runs 700 screens across seven states. Its movie business is especially interesting compared to its peers, because its fiscal fourth quarter ends on the last Thursday in May.

This means that its fourth quarter will include revenue from "Act of Valor" ($69.6), "The Lorax" ($208.4), "21 Jump Street" ($131.9), "The Hunger Games" ($372.0), "Wrath of the Titans" ($80.5), "Titanic 3D" ($56.2), "The Avengers" ($200.7), "Dark Shadows" (Estimate - $76), "Battleship" (Estimate - $115.8), and "Men in Black 3" (Estimate - $219.4). The numbers are for total domestic box office from IMDB.com to give you an idea how the big releases performed and how some are still performing in theaters. The estimates are based on the current prices on the Moviestocks on The Hollywood Stock Exchange .

On its third quarter earnings conference call, Marcus also discusses the benefits of mid-range movies. These are movies with a lower budget than blockbusters and of course lower expectations at the box office. Because of this, the middle class films are cheaper for an exhibitor to show. The third quarter had a number of good performing films in this range and this is the main reason that Marcus reported higher earnings despite lower box office returns during the holiday season.

Marcus reported strong results for its fiscal third quarter which ended February 23rd. Its revenue increased 9.6% to $92 million and net income was $0.03 per share over a loss of $0.07 for the third quarter of 2011. The third quarter of 2011 also contained a $0.04 charge for unusual items. In the past, the third quarter has been Marcus' worst of the year for the theater division, mostly due to poor weather conditions, which reduce travel in its Midwestern locations.

After the third quarter earnings release, the stock sold off initially, but has been trading in a range ever since. When "The Avengers" numbers were released last weekend, the stock traded up 6.38% and finished the week near its 2012 highs. Despite a disappointing box office performance from the new Johnny Depp/Tim Burton movie, I expect it should trade higher this week as well. Other films wisely pushed their releases back to avoid competition with "The Avengers". There are many potential blockbusters before the company releases its fourth quarter and full year earnings at the end of July, and even if some of them disappoint, I expect the stock to be relatively stable. For this calendar year, the company expects to show 20 more movies at its theaters than in 2011. This should not only increase the box office take, but also the revenue the company gets from sales of concessions.

Marcus actually makes a substantial portion of its revenue from theater concessions and food. In January, it opened a newly constructed Zaffiro's Pizzeria & Bar restaurant in St. Cloud, Minnesota. It was the second Zaffiro's, while a third is currently under construction and is expected to open in early June. The breakdown of Marcus' revenue for the 13 weeks ending February 2012 is as follows:

  • Theatre admissions $35,0003,000
  • Rooms $15,918,000
  • Theatre concessions $18,524,000
  • Food and beverage $11,569,000
  • Other revenues $11,063,000
  • Total = $92,077,000

Marcus' stock has been under a lot of pressure since the recession in 2008. The recession hit the hotel business like Mike Tyson in "The Hangover" and hasn't completely let up, even to this day. The sector has been steadily recovering, but the recovery has been far slower than the downturn. An important metric to gauge the health of the hotel business is the average daily rate or ADR.

I haven't mentioned the hotel business until now for several reasons. Number one, I'm much more familiar with the movie business. Number two, the hotel business accounts for significantly less revenue than its theater business. And number three, the hotel business has operated at a loss since it began.

Starting in September of 2008, the overall industry ADR went from $108 down to a low of $97 over the course of 19 months. In the 19 months since then, it has rebounded to $102, so the decline was twice as fast as this current recovery has been. The increasing ADR revenues are lead by improvements in business travel, and Marcus has specifically seen increases over its competition in the number of group business bookings. These help fill rooms without the need to rely on internet distribution channels, which offer heavily discounted rooms. Historically, summer has been the best season for Marcus' hotel business.

The stock pays an 8 and a half cent dividend every quarter dating back to 2007. Having a decent summer will likely not cause Marcus to increase its dividend, as it is spending a lot of capital to expand its restaurants and theater businesses, but it should add stability to the stock. The summer box office should be one of the strongest in years and its hotel business is showing signs of a recovery. The stock is also thinly traded and unlikely to jump on any given day. I think the gains will be slow and steady, and if it can break out of its trading range, it should reach $15 per share by late fall.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (MCS) over the next 72 hours.