Summary
- The Marcus Corporation is a company dedicated to the hospitality and entertainment industry. Its numbers include 85 movie theaters with more than 1,500 active screens in 17 states.
- In addition to the investments for the acquisition of new theaters to expand its business, I would expect further enhancements in the type of seats in theaters.
- Management expects to expand promotions and give more benefits in its subscriptions program. I assumed that these initiatives will likely bring more operating margin.
Entertainment and hospitality provider The Marcus Corporation ( MCS ) reports a massive amount of know-how accumulated, and expects to build or acquire more hotels or theaters. The company also announced that it is considering offering sport viewing or gaming auditoriums, which may enhance revenue growth generation. In my view, if the net debt/adjusted EBITDA ratio remains under 2x-3x, and failed programming or lower expenditure in hotels doesn't show up, the current stock price does seem too low.
Business Model
Founded in Wisconsin in 1935, The Marcus Corporation is a company dedicated to the hospitality and entertainment industry. Its numbers include 85 movie theaters with more than 1,500 active screens in 17 states throughout the United States as well as an establishment for family entertainment in Appleton, Wisconsin.
In my view, it is very relevant noting that Marcus runs a significant number of locations, but appears even more interesting as management continues to acquire new movie theaters. In the last six years, the company added 36 new theaters, which means that The Marcus Corporation has expertise in the M&A markets as well as a lot of initiative to buy new businesses.
Source: Investor Presentation
A majority of the company's revenue comes from the theater business. In the first three quarters in 2022, net sales stood at $310 million, and the operating margin stood at 2.5%. The increase in sales as compared to 2021 is quite impressive. I believe that Covid destroyed a significant part of the company's revenue in 2021.
Source: 10-Q
In relation to its hotel establishments, Marcus has 8 hotels owned or majority owned along with the management of another 11 hotels or resorts in the USA with a total of 7,400 rooms available to the public by the year 2022. In the first three quarters of 2022, the company reported net sales of $204 million with operating margin close to 9%. Sales growth as compared to the same period in 2022 was equal to 52%, which also appears quite impressive.
Source: 10-Q
I Would Study The Future Net Debt/Adjusted EBITDA Ratio
As of September 2022, Marcus reported cash of $10.529 million together with restricted cash of $6.266 million, accounts receivable of $26.127 million, and assets held for sale of $517 million. Other current assets would stand at $17.992 million, and total current assets would be $61.431 million, lower than the current amount of liabilities. It is, in my view, not ideal.
Source: 10-Q
Regarding the property and equipment, Marcus reported land and improvements of $130.057 million, buildings and improvements of $766.138 million, improvement leasehold of $167.579 million, and furniture of $385.715 million. The finance lease right of use assets were around $75.282 million, and the construction in progress was worth $9.476 million. In sum, the net property and equipment was worth $748.796 million.
Source: 10-Q
Non-current assets include operating lease rights of use assets of $205.414 million, investment in joint ventures of $2.231 million, and goodwill worth $75.034 million. Finally, with deferred income taxes of $9.903 million, total assets stood at $1.11 billion.
Source: 10-Q
Marcus also reported accounts payable worth $24.609 million along with taxes other than income taxes of $18.344 million, accrued compensation of $15.755 million, and other accrued liabilities of $55.154 million. Current portion of finance lease obligations was worth $2.485 million together with a current portion of operating lease obligations of $15.930 million. Finally, current maturities of long term debt were $11.095 million, and total current liabilities stood at $143.590 million.
Source: 10-Q
With finance lease obligations of $15.528 million, accompanied by operating lease obligations of $203.675 million and long term debt of around $212.530 million, Marcus reported deferred income tax of $26.406 million. Finally, other long term obligations were equal to $57.267 million.
Source: 10-Q
In my view, right now, the current amount of leverage does not represent a risk for Marcus, however investors will do good by having a careful look at future net debt/adjusted EBITDA ratio. In the past, this ratio came close to 7x, which appears elevated.
Source: Investor Presentation
Free Cash Flow Analysis: Positive CFO And FCF In 2022
I didn't find a lot of forecasts from analysts with respect to future free cash flow generation. With this in mind, I studied a bit the most recent FCF reported by Marcus. I assumed that future free cash flow numbers wouldn't go far from Marcus's most recent cash flow stats.
In the year ended December 30, 2021, net cash provided by operating activities or CFO stood at $46.251 million with capex being $17.082 million. In sum, I obtained FCF close to $29 million.
Source: 10-k
In the 39 weeks ended September 29, 2022, the company reported CFO close to $63.362 million and capex of $27.483 million. Therefore, the free cash flow was equal to $32.8 million.
Source: 10-Q
My Base Case Scenario
In relation to its plans for the future, Marcus aims to maximize profits and gain room for maneuver for remodeling and various investments in the face of a world of entertainment transformed by the Covid pandemic. For this, it plans to expand the offer in rooms, in comfort and in its food services. Also, management expects to expand promotions and give more benefits in its subscriptions program. Under this case scenario, I assumed that these initiatives will likely bring more operating margin, and will enhance FCF expectations.
In addition to the investments for the acquisition of new theaters to expand its business, I would expect further enhancements in the type of seats in theaters to provide comfort to its customers as well as more developed technology screens for attracting new audiences. Marcus acquired new theaters and built many others, in which it not only has movie programming but also options to eat in the establishment with snacks, dinners imitating the Hollywood of the 50s, and other themes related to the cinematographic field. New acquisitions and better customer service will likely bring revenue growth.
It is also worth noting that for its frequent customers, the company offers free popcorn and other benefits as well as the promotion on Thursdays for tickets at $5, which together with advertising on screens and in the corridors of the theaters are the sources of income offered by this segment. In my view, successful loyalty programs to connect with existing clients will likely bring more consistent revenue growth.
Source: Investor Presentation
Its hotels, those owned by it and those managed by third-party owners, have received numerous awards from automobile museums or awards on hotel management and business in relation to art, giving recognition and prestige to its facilities. In my view, more marketing materials focusing on the recognitions received could bring more investors. As a result, the cost of equity may decline leading to higher cost of capital and larger fair value.
I also believe that new entertainment options like sport viewing, gaming auditoriums, or 4DX auditoriums could bring significant revenue generation. Management made several commentaries about these new innovations in a recent quarterly presentation.
Source: Investor Presentation
Under this scenario, I expect 2026 revenue of $912.84 million, 2026 EBITDA of $75 million, and EBIT close to -$69.74 million. If we also use an effective tax of 22.01%, the EBIAT would stand at -$54.39 million with D&A close to $133.64 million, changes in accounts receivable of -$5.29 million, and changes in inventories of -$0.53 million. Besides, with changes in accounts payable of $3.93 million and capital expenditures of -$50.66 million, the 2026 FCF would stand at $26.7 million.
Source: Internal Estimates
I also forecasted an EV/EBITDA multiple of 11.7x, which would imply a terminal value of $877.5 million and NPV of terminal value of $692.45 million. In sum, I obtained an enterprise value of $763.86 million, which, with cash for $10.5 million and debt of $240.4 million, implied an equity of around $533.96 million. If we also assume a share count of 31.508 million, the fair price would stand at $16.95 per share with an IRR of 4.06%.
Source: Internal Estimates
Competition
Both the hospitality and movie entertainment markets are highly competitive in the United States. Although Marcus is the fourth largest agency for theaters and is recognized nationally with various awards, it is positioned in a business ecosystem that is permanently offering benefits and new promotions to attract customers.
Its main competitors in the theater and entertainment segment are Cinemark ( CNK ), AMC Entertainment ( AMC ), and Regal Cinemas. We also included streaming platforms in this list as they indirectly compete for the same potential customers.
As far as its hotel segment is concerned, the biggest competitors are Hilton ( HLT ), Hyatt ( H ), and Marriott ( MAR ) along with new temporary rental platforms such as Airbnb ( ABNB ). I believe that these competitors have larger financial resources than Marcus. Aggressive strategies from competitors could push the company's FCF down.
Key Risks : Lower Spending On Tourism And Hotels, Or Failed Relationships With Content Providers Could Imply A Valuation Of $13.65 Per Share
Marcus is a company that has managed to position itself on a large scale in the national market in its almost 100-year history, and is currently facing a challenge in the transformation of the entertainment industry accelerated by the pandemic. This is not a direct risk, but it does force the company to offer attractive services to its consumers. The inability to generate new channels of approach to its consumers will put the future operations of the company at risk. The same is true for the hospitality industry, where the costs with digital platform competitions are really hard to match.
On the other hand, Marcus' strategy is conditioned by an almost permanent unpredictability in the timing of demand, for the entertainment as well as hotel segments. Added to this temporality, lack of projection is the current economic crisis, which, according to many analysts, may worsen during the year 2023, which could bring lower spending on tourism and hotels. This along with the potential disruption of supply chains for its food locations as well as the inability to maintain relationships with content providers for his theaters are risk factors for Marcus.
Under the previous conditions, I assumed 2026 revenue of $695 million, 2026 EBITDA of $60 million, and EBIT of -$48.77 million. Also, with an effective tax rate of 22.01%, the EBIAT would be around -$38.04 million.
I also included D&A close to $108.77 million, changes in accounts receivables of -$0.88 million, changes in inventories of -$0.09 million, and changes in accounts payable of $0.65 million. Finally, with capital expenditures of -$5 million, the 2026 FCF would be $65.41 million.
Source: Internal Estimates
If we also assume an EV/EBITDA of 11.655x, the terminal value would stand at $699.3 million, and the NPV would be $550.68 million. Besides, the enterprise value would be $660.12 million with equity of $430.22 million. Finally, with a share count of 31.508 million, the fair price would be close to $13.65 million, and the IRR would be -3.01%.
Source: Internal Estimates
Conclusion
Marcus reports a massive amount of know-how accumulated after many years in the hospitality and entertainment industry. Management knows well how to acquire new theaters and hotels, and recently brought many new innovations including sport viewing or gaming auditoriums, or 4DX auditoriums. In my opinion, if Marcus successfully controls its net debt/adjusted EBITDA ratio, investors will likely have a look at future revenue expectations. Even considering risks from supply chain issues, failed content programming, or lower expenditure in hotels, Marcus remains undervalued.
For further details see:
Marcus: Sports Or Gaming Auditoriums Could Be A Game Changer