Marcus Offers Growth And Diversification, Trades At Fair Multiples

| About: Marcus Corporation (MCS)
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Summary

Marcus is a regionally focused movie theater and hotel operator.

The company uses relatively little debt in a capital-intensive industry, while solidly growing its operations.

The fair valuation, and lack of long-term earnings growth limits the appeal in my eyes, as I see few triggers to send shares higher in the short run.

Marcus (NYSE:MCS) is a small lodging and entertainment provider, not being known that well by the wider investment public. The company operates in Wisconsin and adjacent states and has shown modest growth over the past decade, although investors have not seen great returns.

The company is well run and uses relatively little leverage in a capital-intensive industry which combined with the diversification within the business creates a lot of stability, supported by a fair dividend yield. That said, while the results are fair and long-term growth is apparent, I see few triggers for shares to meaningfully outperform in the short run.

The Business Overview

Marcus provides both lodging as well as entertainment. The company owns or operates some 19 hotels, which combined total some 5,200 rooms across 10 US states. The company furthermore owns 55 movie theaters, which contain a total of 685 screens across 7 US states.

Sales of both businesses are roughly equal, although the theater business contributes nearly three quarters of total operating earnings reported by the overall business. The company is happy with the diversification offered by this business model, with theaters being a steady and resilient growing business as the hotel business is still in recovery mode.

Marcus is furthermore pleased with the strong real estate assets, the conservative capitalization and leading positions in their local fields, as the strong capital base allows for growth in the capital light hotel industry. Just like the theater assets, the hotels owned and operated by the business are mainly located in Wisconsin and its adjacent states.

The Theater Business

The theater business has invested heavily in new techniques like 3D, having increased its total screen count by a third over the past several years.

Following strong traffic growth in 2012 and 2013, growth was limited to 0.7% in 2014 including the decision to introduce Tuesday $5 promotions, which hurt average ticket prices. Despite these negative short-term trends, EBITDA margins come in around 25%, outpacing the margins reported by leaders like AMC (NYSE:AMC) and Regal (NYSE:RGC), among others. Growth has continued despite perceived threats like Internet, DVDs and online streaming, with theaters proving to be surprisingly resilient, thanks to the relative low cost of entertainment compared to its alternatives.

Key reason for the strong margins and strong operational performance has been the fact that Marcus owns its theaters, at least close to 85% of its locations, with competitors typically leasing the properties they run. Besides saving on rent, this provides a lot of flexibility as well as secures investments being made into screens, and related equipment such as lounges.

The Hotel Business

Marcus furthermore majority-owns 9 hotel properties. On top of this, it manages 10 other properties, combined containing some 5,200 rooms. Since 2011, demand in the hotel business has outpaced supply, creating better operating conditions for the business to operate within. This in turn has driven up occupancy rates as well as average daily rates, although they have not returned to historical highs yet. Marcus stresses that it is still relatively early in the recovery in the hotel sector, with growth anticipated to continue in the coming years.

The company stresses the flexibility in its operations, regularly pursuing acquisitions or making divestments depending on the prices which it can fetch for its properties, or levels at which it can acquire new assets.

A Real Growth Story

The dual focus of the company, conservative financing and excellent management has created real growth over the past decade. Since 2005, Marcus has grown its sales by a cumulative 75% to $466 million on a trailing basis, which translates into average growth of 5-6% per year including the recession period, which is solid.

Net earnings have been much more stable, coming in anywhere between $14 and $34 million over this time period. Earnings are currently on track to come in at around $25 million per year, based on fairly stable EBITDA reported at $85 million last year. That said, Marcus has bought back roughly one in every ten shares outstanding over this time period, providing a bit more growth on a per share basis.

Marcus has a fairly strong balance sheet, which contains roughly $18 million in cash, while it has some $269 million in debt outstanding which results in the fact that the business is roughly $250 million net in debt. That said, the business has real tangible assets against this debt load, being valued at roughly $650 million on its balance sheet.

With 27 million shares outstanding and those shares trading at $19 per share, Marcus's equity is valued at $510 million, which values the business at $760 million after adding back the debt. This results in fairly attractive multiples at 9 times EBITDA for the business, as equity trades at close to 20 times trailing earnings.

Final Conclusions

Marcus has a great very long-term multi-decade track record in creating value for its investors, as the company has grown sales by 75% over the past decade as well. This growth over the past decade has not paid off for investors however as shares still trade below the $20-$25 levels seen before the recession.

Following a consolidation in the $5-$15 region since 2008, shares did manage to regain upside again, hitting highs of $20 during this summer, currently trading within reach of those levels. A fairly conservative leverage ratio in a capital-intensive industry, the large ownership of real assets and a 2.0% dividend yield have been supportive for the shares amidst continued operating improvements.

While earnings multiples are a bit steep, following the long-term lagging of earnings compared to sales, I am fairly constructive on the shares as the earnings multiple is more or less in line with the wider market.

On top of the advantages already mentioned, the diversification in its business provided by operating two separate businesses, should ensure continuation and support the 2% dividend yield. This combined with solid management, allows for long-term rewards, although investors should not realistically expect great returns in the short to medium term, with a lack of triggers being apparent.

As such, shares are probably perfectly worth holding onto, or could be accumulated on dips by long-term holders.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.