|Shares Out. (in M):||28||P/E||18.61||18.38|
|Market Cap (in $M):||458||P/FCF||0||0|
|Net Debt (in $M):||225||EBIT||47||52|
|TEV (in $M):||683||TEV/EBIT||15.29||18.61|
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Marcus Corporation (MCS) is a low risk opportunity to invest in a regionally dominant movie theatre and hotel franchise at a very attractive valuation (lowest among both movie theatre and hotel peers) with significant, realizable catalysts.
MCS essentially runs two disparate businesses: Theatres and Hotels & Resorts. In the Theatre business (54% of LTM Sales), MCS operates nearly 700 screens located throughout the Midwest, maintains nearly 80% market share in its home-state of Wisconsin, and is the fifth largest movie theatre circuit in the country. In the Hotel & Resorts business, MCS operates or manages 20 upper-upscale properties comprising approximately 5,200 rooms in 11 states.
MCS has two significant, realizable catalysts which are neither reflected in its current valuation nor in consensus estimates: a historical 2016 movie slate and pricing opportunities in its Theatres segment and asset monetization in Hotels & Resorts segment.
Catalyst 1: 2016 Movie Slate & MCS’ Pricing Power
A deep and highly anticipated 2016 movie slate combined with its ability to raise prices will enable MCS to reach its potential earnings power in 2016.
Movie theatre exhibitors are beholden to Hollywood’s ability to produce hits. A weak movie slate means reduced ticket and concession sales, pressured margins, and lower profitability for exhibitors. This most recent summer’s movie slate was particularly weak, representing a 17% year over year decline in domestic box office receipts—the worst year over year decline in over 20 years. By contrast, the 2015/2016 movie slate is expected to be the best ever and includes the following blockbusters: Star Wars: Episode VII, Jurassic World, Batman vs. Superman: Dawn of Justice, Bond 24, Hunger Games: Mocking Jay, Part 2, and Terminator: Genisys, among others.
In fiscal 2014, MCS invested $50 million dollars in renovation, expanding its large-format screens and reclining seating to bolster its premium movie-going experience without raising prices. In fact, MCS hasn’t raised admission or concession prices in nearly one and a half years; average ticket prices fell 4.8% in fiscal 2014 and 10.6% in FQ1 2015, particularly due to its $5 Tuesday promotion.
With this promotion having been fully anniversaried as of mid-November—and with management expecting to make “selective price increases in the months ahead”—ticket prices are expected to return to growth mode. When combined with a deep 2016 movie slate, price increases will enable MCS to achieve its full earning power in 2016.
According to the MPAA, the average cost of a movie ticket in 1910 cost $0.07 versus $8.12 today. This represents a compounded average price increase of about 4.7% per year. We believe MCS can easily roll-out a 4% price increase without any negative response from its customers, as a 4% increase to a $12 dollar evening admission ticket—which includes a high definition, large screen format with a reclining seat—amounts to a mere 50 cents.
Consensus figures drastically underestimate MCS’s pricing opportunity. Crude assumptions taking into account a small ticket price increase can easily bridge us past 2016 consensus EPS estimates. Let’s assume that Hotel & Resorts generate the same level of sales and operating profits in 2015 and 2016 as it did in 2014 and that Corporate expense jumps from $13.9 in 2014 to $15.0 million in 2015 and $16.0 million in 2016. In the Theatres segment, let’s assume that prices for concessions do not change in 2015 and 2016 and that theatre attendance increases by 5% in 2015 to reflect a 5.5 month benefit from the $5 Tuesday Promotion (this promotion began mid-November 2014).
Given these assumptions, we are left with only 2016 ticket price and attendance as our variables:
Even with a conservative 4% ticket price increase and 4% comparable attendance growth, the lowest end of our range, 2016E EPS of $1.02 exceeds the consensus estimate of $0.96 by $0.06. Given the strong 2016 movie slate and MCS regional dominance in much of the Midwest, more robust price increase and attendance growth is expected.
Catalyst 2: Asset Monetization
Within the hotel space, MCS differentiates itself from peers by owning roughly half of its real estate properties. This compares to 16% for Hyatt, 4% for Hilton, 4% for Starwood, and less than 1% for Marriott. Recently, management has decided to reevaluate its business model, favoring an asset light strategy of hotel management versus the capital intensive strategy of property management. Historically, when asked about selling assets, management refused to comment, but this tone has recently changed. During its most recent shareholder meeting, MCS’s General Counsel Thomas Kissinger had mentioned that the company is “actively pursuing a number of other potential opportunities…In addition to adding new hotels, we may also consider divesting selected properties to realize the value created over a number of years.”
Comprising nearly 3,000 rooms, MCS owns nine upper/upscale hotel and resort properties that can be monetized. Using a range of price per key metrics for comparable properties located in the Midwest, we believe MCS’ nine owned properties are conservatively worth approximately $350 to $520 million dollars, or 50.8% to 76.2% of MCS’ entire enterprise value.
*Represents the Smith Travel Research estimate for Upper/Upscale properties.
Using Smith Travel Research’s recent estimate of ~$194,000 per key for upper/upscale properties, MCS’s properties would be valued at ~$546 million, or roughly 80% of MCS’ current enterprise value.
We can apply a similar valuation methodology to estimate a range of potential values for MCS’s theatre assets.
*Represents the midpoints of Carmike’s stated range of $300,000 to $650,000 per screen.
Using precedent theatre transactions, we derive a potential range of values of $240,000 to $360,000 per screen. With 674 company-owned screens, MCS can potentially monetize these assets for ~$161 to $240 million dollars. We believe our assumptions are conservative as Carmike—which has a growth through acquisitions target of 3,000 screens—has stated in its Q4 2013 earnings call that it has purchased assets for $300,000 to $650,000 per screen. Given Regal’s recent announcement that it is exploring strategic alternatives, we that the current environment is a fertile one for industry M&A and that MCS is well positioned to divest assets should an attractive offer come its way.
The market is valuing MCS as an unexciting movie theatre business that receives even less credit for its hotel franchise. On an EV/EBITDA basis, MCS trades below every peer in both its movie theater and hotel peer group. Part of this valuation disconnect can be attributed to MCS’ disparate segmentation, which causes confusion in the stock’s valuation and assignment of analyst coverage. Additionally, despite owning a substantial proportion of its properties (~80% of its theatres and ~50% of its hotels), MCS trades at 44.4% discount to movie theatre peers and 74.3% to its hotel peers.
Applying a normalized theatre multiple of 9.9x to MCS’s firm-wide TTM EBITDA of $83.2 million, MCS shares possess at least 30% upside.
This valuation gives offers MCS no benefit of the higher multiples that the market rewards for its hotel peers, and as a result is a very conservative.
2016 Earnings Power Sum of the Parts
MCS will realize its true earnings power in 2016. In the theatre segment, MCS will benefit from a highly anticipated movie slate as well as from pending ticket price increases, as we have described above. Furthermore, 2016 will be company’s first full year of the Marcus Cinema in Sun Prairie, Wisconsin, a 12-screen theatre with recliner seating in every auditorium, four Big Screen Bistros, an on premise pizza parlor and bar and lounge concept.
In the Hotels & Resorts segment, MCS will benefit from a full year from renovations made at the Cornhusker Hotel in Lincoln, Nebraska, the Westin Atlanta Perimeter North in Atlanta, Georgia, and at the new AC Hotel in Chicago, Illinois. Additionally, MCS will earn incremental profits from the newly acquired management contracts at the Heidel House Resort & Spa in Green Lake, Wisconsin as well from the Hotel Zamora in St. Pete Beach, Florida.
Applying a range of valuation multiples to both the Theatre and Hotels & Resorts segments, and capitalizing corporate costs at a weighted average multiple, MCS is worth $19.17 to $32.82 per share, which represents 15.55% to 97.84% upside from its current $16.59 share price.
Margin of Safety
An investment in MCS provides a substantial margin of safety in the form of hard asset values as well as from the stewardship of a talented, shareholder friendly management team.
Talented Management Team
Management has a proven track record of skillful capital allocation and has demonstrated its investment savvy by divesting assets at attractive prices. For example, in an effort to focus the Company’s operations in the theatre and hotel businesses, MCS sold its 30 Kentucky Fried Chicken franchise operations in 2001 for approximately $26 million, which was used to pay down debt, fund capex, and repurchase stock. In 2004, MCS sold its motel division, Baymont Inn & Suites, to La Quinta for approximately $415 million, which resulted in a special dividend of $7 per share in 2006. Also, while there has been no stated intention of doing so, management has the option to divest one of their segments if this creates shareholder value.
MCS has a proven history of returning capital to shareholders in the form dividends and share repurchases. In the past decade, Marcus has returned approximately $330 million dollars to its shareholder in dividends and approximately $44 million in the form of net share repurchases, which combined approximates its current $393 million market cap.
Hard Asset Values
Using the low end of very conservative metrics, MCS’ owned hotel properties and theatres are worth at least $507.6 million dollars.
*Represents the Smith Travel Research estimate for Upper/Upscale properties.
**Represents the midpoints of Carmike’s stated range of $300,000 to $650,000 per screen.
A more realistic valuation metric is that referenced by industry experts: ~$194,000 per key for upper/upscale hotel properties cited by Smith Travel Research and the $300,000 to $650,000 per screen cited by Carmike. Using these metrics, MCS’s asset alone are worth $865.9 million, or 26.8% more than MCS’s current enterprise value. Even if we were to liquidate these assets, MCS would still be left with hotel property and a handful of theatre management contracts, a small JV investment, and a land development deal in Brookfield, Wisconsin.
Excess Hotel Supply in Milwaukee
In the past two years, three new Milwaukee hotels—the Hilton Garden Inn, the Marriott Milwaukee Downtown, and the Brewhouse Inn & Suites—opened its doors. When combined with the new Potawatomi hotel and casino, these additions increase the local supply of hotel rooms by over 20%. This is not a problem if the city of Milwaukee experiences a commensurate increase in demand, but there has been no indication that this will occur. Over time, this capacity will be absorbed, but will likely impact all hotel operators in the medium term.
1) 2016 movie slate & pricing power
2) Asset monetization
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