- MCS has rallied hard from the March bottom.
- But I think the recovery will either be very slow or not come at all.
- With an enormous earnings multiple, Marcus is way overpriced.
The COVID-19-related shutdowns across most of the developed world created some extremely difficult conditions for a variety of businesses. Among the hardest hit were movie theaters and hotels, the former suffering because they simply aren't allowed to open in most places, and the latter because travel all but stopped earlier this year. One company that is exposed to both in a big way is Marcus Corporation (NYSE:MCS), and with shares rallying extremely hard to the upside in recent weeks, I think it is time to take profits.
Exposure to entertainment and travel at just the wrong time
Marcus had a decent year in 2019, posting record revenues, but seeing operating income and earnings-per-share decline, respectively.
Source: Investor presentation
Revenue was up more than 16% but earnings fell on slim margins due to high operating costs. The company has built itself over the years on high leverage to the movie theater business, which is how the company began 85 years ago. Marcus has always been a movie theater company, but has also dipped its toe into restaurants and hotels in the past in various forms. It still has hotels and restaurants/bars, but this is primarily a movie theater business, and I think shareholders may suffer for it.
Obviously, Marcus had to shut down its theaters earlier this year. However, the company came into the crisis with a decent balance sheet that should see it through this crisis.
Source: Investor presentation
It took the above actions to strengthen itself against shutdowns, including a new $90 million term loan, and noted it had $126 million of cash on the balance sheet as of the end of Q1. Marcus believes it can continue with shutdowns until 2021 if needed, which should be a sigh of relief for investors that may have thought Marcus wouldn't survive. I think it will survive, but I also think the stock is way too expensive.
I mentioned before this is primarily a movie theater business, and we can see why below.
Source: Q1 earnings release
The company's revenues are heavily dependent upon ticket sales and theater concessions, both of which would have been essentially zero from the middle of March through today. Its hotel and restaurant businesses would have suffered immensely as well during this time, as Marcus is leveraged to all the wrong types of businesses during this time. Of course, Marcus isn't alone, but it doesn't make it any less painful.
Marcus' margins aren't very good even in good times, so coming out of the crisis, I have to imagine profitability will be quite difficult. In last year's Q1, which I think would be fair to consider normal conditions, operating income was $4.95 million on $170 million in revenue. The company's theater concession business posted ~$28 million in operating profits in last year's Q1, with the rest of the business collectively hitting something like -$23 million to come to the ~$5 million total operating profit number for the quarter.
This is a company with leverage to a business (movie theaters) that is very cyclical and has slim margins even during good times, but the problem is that we don't know how consumers will react when shutdowns are lifted.
Just because consumers are eventually going to be allowed back in movie theaters does not necessarily mean they will go. The same is true for hotels, airlines, and any other places that require people to be in large groups. This is not a problem specific to Marcus, but it is definitely a problem Marcus has to contend with.
In addition, the movie theater business is under tremendous duress given not only the issue I just raised, but also the idea that movies may be better off going straight to streaming platforms rather than movie studios sharing revenue with movie theaters.
The very public example of the Trolls World Tour straight-to-streaming from earlier this year illustrated this point. The studio made more money on this movie than the prior one by sending it straight to streaming platforms, rather than through a theater distributor. If studios realize they can make more money by simply streaming their movies, why would they share their revenues with movie theaters? In addition, if movies can be streamed for $20, this is cheaper than two movie tickets, let alone once you add in concession revenue. For example, instead of a family of four buying four tickets for $13 each, plus another $5 to $8 in concession spending for each person, instead of spending $80 or so going to the theater, the family can simply stream it for $20. This is a much better value proposition for the consumer, as well as the studio, and the loser is the movie theater.
This, in my view, puts the very model of movie theaters at risk, and with Marcus being so heavily leveraged to other companies sharing their content revenues, this is not a good thing by any stretch.
An untenable valuation
All of this adds up to what I think is an overpriced stock that appears to be assuming a complete recovery, and then some.
Source: Seeking Alpha
Earnings are obviously going to be well into the negatives this year, with current estimates at a loss of $2.67 per share. That's a lot of money Marcus is going to lose this year, but what is interesting is that expectations are for Marcus to take three or four years to even recoup the $2.67 per share it is expected to lose this year alone.
With earnings at 51 cents per share next year and 85 cents per share in 2022, Marcus is extremely overpriced. Shares trade at 37 times next year's earnings and 22 times 2022 earnings, neither of which are tenable in my view.
Marcus posted declining earnings for each of the past three years, with 2019 EPS at $1.35, down from $2.29 in 2017. This is not a healthy business that deserves a huge growth multiple like 37 times earnings, or even 22 times earnings, in good times, let alone during or after a serious crisis.
For these reasons, I see Marcus as tremendously overvalued and I think the rally we've seen is a mistake. If you own Marcus, do yourself a favor and take profits. If you insist on owning Marcus, I think you'll be able to buy back at much lower prices in the coming months.
This article was written by
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