Marcus Corporation (NYSE:MCS) is involved in two main business segments: movie theatres, and hotels and resorts. At the end of May 2011, the theatre operation has 55 movie theatres with 684 screens in different areas such as Wisconsin, Ohio, Illinois, Minnesota, North Dakota, Nebraska and Iowa. Out of that, there are two movie theatres with 11 screens owned by third party but managed by the company. The company is considered to be the sixth largest theatre circuit in the U.S. For the hotel and resorts segment, it owned and operated eight hotels and resorts in Wisconsin, Missouri, Illinois and Oklahoma. Besides, Marcus is managing 10 hotels and resorts for third parties. Altogether, it owned or managed over 1,700 hotel and resort rooms.
By screening the business overview of the company, we can discover that it owns a lot of fixed assets known as movie theatres and hotels and resorts. At the end of fiscal year 2011, in its balance sheet, the gross PP&E amounted to more than 130% of the total assets, whereas the net PP&E stands at 83%, quite a high figure. And the fixed assets are financed by nearly 50% in equity — 32% in both short-term and especially long-term debts. As it owns a huge amount of PP&E, we would expect the initial outlay would be large, but after that the business just keeps spitting out cash, so it is expected to have constant positive cash flow from operating. However, the free cash flow might not be as good, because with a large PP&E, a good size of investment into maintenance and reinvestment would be required.
Recently, the executive team of Marcus held a conference call to discuss the first quarter 2012 results. The CFO, Doug Neis, mentioned that the summer is the peak for the cash flow while at the same time Marcus generally avoids large capital spending. The overall debt to capitalization ratio was down from 39% to 36% due to strong cash flow in the summer, even though Marcus has repurchased over 400,000 of common shares during that quarter. The total capital expenditure totaled $3.7 million, higher than over $2 million first quarter last year. The large amount of $2.7 million out of total capex results from the renovation at Hotel Philips. They expect the capex for fiscal 2012 to be around $50 million - $90 million.
Regarding operations in the theatre business, the average admission price increased by 1% for the quarter and average concession and food and beverage revenue per person increased by 11.7% quarter-on-quarter. Doug said that pricing, concession product mix and film product mix are three primary important factors. The operating margins increased from 22.5% last quarter to 24.2%. For the Hotel and Resort division, overall hotel revenue is up 9.8% and total revenue per available room was up the same 9.8% for this quarter. The increase happened in both rates — the overall occupancy rate of 2.7% and the average daily rate of 6.4%.
Looking at the revenue fractions of Marcus over the last three years, the biggest revenue item is Theatre admission, and the second is rooms and theatre concessions. However, the largest gross margin is from theatre concessions, at nearly 25%, whereas theatre admission has only a 15% gross margin. Over the 10-year history of operation, it has had 10 years of positive earnings, with fluctuations in revenue, and quite consistent positive cash flow. It also only had one year of negative operating cash flow and only two years of negative free cash flow.
|Operating Cash Flow||73||72||92||-13||40||65||58||69||53||62|
|Free Cash Flow||24||46||41||-76||4||-46||33||34||28||36|
As predicted regarding to cash flows, though the operating cash flow average 10 years was $51 million, the free cash flow averaged only $12.4 million due to the large capital spending in 2005 and 2007.
For valuation, Marcus has received high P/E valuation consistently over the last 10 years, with the value ranging from 17 to 29. Currently, it is trading at earnings yield near 4.5%. With the high level of debt, high level of assets, high amount of capital expenditures, and high valuation, Marcus is clearly not a good stock for investors to hold for the long term. Hotels, resorts and theatres, like airlines business, are the businesses of reaching high occupancy, filling seats for theatres and filling rooms for hotels and resorts. Warren Buffett once said that he loved to go to the cinema but didn’t like to own one.