The Marcus Corporation ($MCS)

US movie theater chain + hotel business

The Marcus Corporation ($MCS)

Price: $15.92

Fully-Diluted Shares Outstanding: 32.17MM

Market cap: $518MM

Enterprise Value: 852.51MM

Introduction

The Marcus Corporation ($MCS) is a family-owned company with two separate businesses: movie theaters and hotels. They operate 79 theaters (and own 43) with a combined 993 screens, and 7 wholly owned upscale/luxury hotels (8 managed for third-party owners, 4,400 total rooms). The theater business makes up two-thirds of revenue and produces nearly all its free cash flow.

The company is unique because it owns 60% of the real estate beneath its theater chain, providing investors with a nice margin of safety, and future value creation if they spun off these assets into a REIT. The hotels could also be included for greater upside, as they are worth around $300-$500 million. Today, the stock trades at $16, and the hotel’s value almost covers this price entirely, leaving a consistently profitable movie theater business earning about $2 per share. This opportunity exists because the market deems the cinema industry permanently impaired.

Thesis

Cinema business

The movie theater business is solid, and way more durable than the market realizes. Marcus remained profitable during the great financial crises; not an easy feat in the entertainment industry. A night out to the movies is still a cheap source of entertainment, and box office revenues have gradually crawled back post-pandemic. While streaming has become a ubiquitous substitute; movie theaters are mainly competing against other “outside” activities. For instance, driving to a Yankees game, Disneyland, or a favorite restaurant rivals a “movie night” more than Netflix. Going to see a new blockbuster movie with family or friends is still a special event, streaming at home lacks novelty and competes with reading a book or playing a video game. 

Part of the issue leading to dampened theater revenue is the supply constraint. A combination of the pandemic shutting down cinema and Hollywood’s strike halting studio production created a lackluster environment for movie production. Contrary to popular belief, demand for cinema has been quite stable, and its supply has been sporadic. Furthermore, prior box office proceeds cannot return rapidly because movies take a long time to create; it’ll take time to heal. The aforementioned struggles point to a depressing future for the industry, forecasting a pernicious decline for theaters has been the reality, but there have been some promising signs of a resurgence. Last summer, “Barbenheimer” was an absolute craze, proving theatrical marketing is valuable for IP; about one in six Americans saw Barbie, or Oppenheimer (or both) opening weekend.

Here are a few recent films that made it on the all-time box office opening weekend top-25 list (rank):

(2) Spider-Man: No Way Home – Dec 17, 2021

Opening: $260,138,569 Gross: $804,793,477

(6) Deadpool & Wolverine – July 26, 2024

Opening: $211,435,291 Gross: $631,645,158

(12) Doctor Strange in the Multiverse of Madness – May 6, 2022

Opening: $187,420,998 Gross: $411,331,607

(14) Black Panther: Wakanda Forever – Nov 11, 2022

Opening: $181,339,761 Gross: $453,829,060

(21) Barbie – Jul 21, 2023

Opening: $162,022,044 Gross: $636,238,421

Moreover, a glance at annual domestic box office revenues (year):

(2024) Total Gross: $6,219,870,400 Releases: 493 Average: $12,616,369

(2023) Total Gross: $8,908,478,987 Releases: 592 Average: $15,048,106

(2022) Total Gross: $7,369,879,934 Releases: 500 Average: $14,739,759

(2021) Total Gross: $4,483,010,556 Releases: 441 Average: $10,165,556

(2020) Total Gross: $2,113,386,800 Releases: 455 Average: $4,644,806

(2019) Total Gross: $11,363,360,766 Releases: 910 Average: $12,487,209

Reaching historic pre-pandemic highs is impossible in the near term. The number of releases has shrunk terribly, thousands of screens have been shut down and studios have become much more selective about production. Also, the fall season is paramount (no pun intended) for movie theaters; I counted the number of box office releases from October to the New Year, and there should be 120 before the ball drops. If we assume the average grosses $15 million, box office (in-month) revenue for the fall season should be around $2 billion (adding cumulative revenues), totaling roughly $8.2 billion for the year, which would result in the first year-over-year dip since the pandemic. However, this decline isn’t terrible, and 2025 box office revenues could reach $10 billion (a new Avatar is being released). 

Cinema continues to be valuable for studios, profitably complementing streaming. Apple has committed to spending $1 billion per year exclusively on original films with theatrical releases.

Furthermore, Marcus has the potential to roll up the industry over time as a source of growth. Per their 2023 annual report, “The movie theatre industry is very fragmented, with approximately 50% of United States screens owned by the three largest theatre circuits and the other 50% owned by an estimated 800 smaller operators, making it very difficult to predict when acquisition opportunities may arise. We do not believe that we are geographically constrained, and we believe that we may be able to add value to certain theatres through our various proprietary amenities and operating expertise.” Marcus is in a very attractive position; a well-capitalized balance sheet, strong profitability, and competent management in an industry with stable competition should provide further growth and enduring cash flows.

The hotel business

Marcus owns 7 luxury hotels and manages 8 other hotels for third-party owners for additional asset-light fee income; this segment makes up another third of revenues. All of their hotels are top-tier; let’s take a brief look at them.

The Pfister® Hotel: Located in downtown Milwaukee, Wisconsin. The Pfister Hotel is a full-service luxury hotel including a VIP Club Lounge, two restaurants, three cocktail lounges, a state-of-the-art WELL Spa + Salon, high-end retail space leased to tenants, and a 275-car parking ramp. The Pfister also has 25,000 square feet of banquet and convention facilities, and renovations to the lobby and historic tower guest rooms are being completed in 2024. Link –

https://www.thepfisterhotel.com/

The Hilton Milwaukee City Center: A 729-room hotel with three restaurants, a cocktail lounge, a Starbucks outlet, and an 870-car parking ramp. It’s directly connected to the Wisconsin Center convention facility by skywalk and offers 30,000 square feet of meeting and event spaces. The hotel was planned to serve as headquarters for the 2020 Democratic National Convention but was canceled due to the pandemic. Recently, it received excess traffic from the 2024 Republican National Convention.

Hilton Madison Monona Terrace: A 240-room hotel in Madison, Wisconsin, connected by skywalk to the Platinum LEEDS and GBAC-certified Monona Terrace Community and Convention. The 14-story hotel offers over 250,000 square feet of meeting space, an indoor swimming pool, and a fitness center.

The Grand Geneva® Resort & Spa: This resort, located in Lake Geneva, Wisconsin, has 356 rooms and 29 villas on 1,300 acres. Also, it features the Geneva Club Lounge, three specialty restaurants, two cocktail lounges, two championship golf courses, a ski hill, indoor and outdoor tennis courts, three swimming pools, a state-of-the-art WELL Spa + Salon, a fitness complex, horse stables, and an on-site airport. Link –

https://www.grandgeneva.com/

AC Hotel Chicago Downtown: Marcus operates the hotel on a long-term lease in downtown Chicago, and it includes 226 rooms. It’s located in the center of the Magnificent Mile district for shopping, dining, and entertainment, and its main customer is a millennial traveler seeking a well-designed hotel in the city. There’s a bar area, kitchen, pool, and gym. The hotel has additional retail or restaurant space available to lease.

The Lincoln Marriott Cornhusker Hotel: Located in downtown Lincoln, Nebraska with 300 rooms, 45,600 square feet of meeting space, and a Miller Time Pub & Grill. There’s also the Cornhusker Office Plaza, which is a seven-story building with 85,592 square feet of net leasable office space to the hotel by a three-story atrium.

Saint Kate – The Arts Hotel: Located in Milwaukee’s theater and entertainment district, this hotel features 219 rooms, 13,000 square feet of flexible meeting space, 11 event rooms, three restaurants, and two bar areas.

The Skirvin Hilton: In 2022, Marcus sold a 225-room in Oklahoma City for $37 million (19x EBITDA)

Valuation

The Marcus Corporation has a track record of cash flow production exceeding the capital requirements to maintain the business’s competitive position. However, the company has recently undergone hotel renovations, so capital expenditures are temporarily inflated. These investments in the customer experience should pay off over time. Additionally, this year’s first-half theater revenue is down significantly (24%) compared to last year due to a weaker box office, but hotel revenue increased modestly (5%). A down year for cinema, albeit not finished, but I think they will return to 2023 levels in the near term.

Free cash flow is depressed this year, but in 2023 the theater business alone produced $2.02 in FCF/share. I think this is a good estimate of their normalized earnings power, and they could potentially reach their pre-pandemic FCF/share of $3.03 over the long term. Also, I expect management to buy back stock and reduce the share count at a modest rate. In the model, I illustrated a base case of decent theater growth and stagnant hotel earnings. I think the bulk of stock returns will come through a multiple re-rate to 12-15x earnings (cinema didn’t die, they own a ton of real estate), and capital returns from dividends and buybacks. An acceleration of earnings growth or a spin-off would be icing on the cake but isn’t necessary for a satisfactory outcome.

The hotel properties substantially de-risk the investment. According to the Penn State “upper upscale” Index of U.S Hotel Values, Marcus’ hotel properties are worth about $482 million net of debt ($265,528 per room). Marcus sold their 225-room Skirvin Hilton in OKC for $37 million (19x EBITDA/$164,444 per room), applying a 15x multiple on Marcus’ hotel EBITDA of $38 million equals $413 million net, and using a conservative $164,444/room leads to a $239 million valuation. The hotels are worth anywhere between $300-$500 million ($9.32-$15.54 per share), and the market cap sits at $517 million currently. Now, this doesn’t consider the 43 theaters Marcus owns, which would create a significant discount to net asset value, but I don’t think selling these cash machines would be germane to the thesis. 

If they were to spin off the hotels, we’d have a family-owned debt-free movie theater with a net cash position and valuable real estate, earning $2-$3 per share. There is a nice margin of safety here, the real estate backstops the valuation at $15/share, and if movies make a full comeback the stock could be worth $30+.

Note: Gate City Capital Management owns 6.64% of the company (12.8% of the portfolio), a concentrated value-oriented fund focused on US micro-caps.

Cinemark

Another major player in the cinema industry is Cinemark, operating over 500 theaters with a presence across the United States (80% of profits) and Latin America (mainly Brazil). The company is the 3rd largest movie theater operator (Marcus is 4th) in North America and has been disrupted by the pandemic like the rest of their competitors. Management is great; insiders own more than 10% of the stock, and the business has 17% EBITDA margins (LTM). Cinemark operates in suburban geographies where cinema is still a popular outing and can negotiate favorable rent terms.

The pure-play movie theater operator has been highly cash-generative, with the bulk of proceeds going toward new and existing theaters, and the rest to dividend payments. They have pumped the brakes on acquiring new theaters and are paying off debt; a prudent use of capital since their net debt/EBITDA is 3.22. Once leverage is lowered, shareholders will be rewarded with a mixture of dividends and buybacks. Free cash flow (LTM) is $213 million, and in 2023 they generated $295 million.

Cinemark is a good movie theater chain, but the stock trades at 11x normalized earnings compared to Marcus’ 8x, a 37.5% premium. This valuation gap is unwarranted considering Marcus’ vast real estate holdings (theater and hotel) and stronger balance sheet. The market is discounting a family-controlled company that has invested heavily in a hotel business, which would suffer in a recession. 

Cinemark’s stock has had quite the run year-to-date (+96%), and Marcus should soon follow suit.