Filed Under:
Tickers in this Article: MCS, RGC, CKEC, H, MAR, CHH
We're a month past the halfway point in 2011 and both the movie theater and lodging businesses appear to be doing well. Not record-setting mind you, but stable. Given what went on in 2008 and 2009, I think most operators of these businesses would gladly accept stable. One company delivering good fourth quarter results is Milwaukee-based Marcus Corporation (NYSE:MCS), whose theater business delivered a 3.6% year-over-year increase in Q4 revenues while its hotels and resorts grew 3.7% in the final quarter ended May 26. Despite the good news, Marcus' stock is down 30% year-to-date. At less than $10, its stock is priced to move. Here's why. TUTORIAL: How To Analyze Earnings

Its stock is trading within 3.1% of its 52-week low and 51% of its five-year low. Nonetheless, its current price-to-earnings ratio is 21, not exactly cheap, even when you factor in the fact it grew earnings in the fourth quarter by 20% from 10 cents a share to 12. Fortunately, a big part of evaluating any stock is to understand how Mr. Market views it. Over the past five years, its P/E ratio has averaged 24.8 times earnings, meaning investors were willing to pay more for a dollar of its earnings in previous years than today. The question is why. The answer might have something to do with the quality of earnings. In the fiscal year ended May 26, its operating margin for the entire 12 months was 8.9%, the lowest rate in the past decade. Compare this to its margins in both 2006 and 2007, when it was averaging 13.2% or 430 basis points higher. Given the difference, it's easy to understand why its stock hit a 10-year high of $26.15 on January 12, 2007. It's also easy to see why it is trolling near a 52-week low. It just doesn't make enough money - yet.

Regal Entertainment Group (NYSE:RGC) announced second quarter earnings July 28 and they were impressive. Revenues grew 3.1% to $753.3 million, and the company's adjusted diluted earnings per share came in at 24 cents - five cents higher than the consensus estimate and 100% better than the same quarter last year. Chalk it up to a good box office that appears to have continued into July. Through July 28, domestic box office receipts are up 4% from July 2010.

Carmike Cinemas (Nasdaq:CKEC) and Marcus should also benefit from this boost in film grosses. When you consider that the holiday season (November to January) films this past year were mediocre at best, the numbers were actually reasonably good. If you know anything about the theater business, you need butts in the seats in order to push the concession revenues. Bad movies mean lower profits. It's that simple. Two interesting endeavors underway that should put people in the seats include installing digital cinema in 630 of its first-run screens, which should be complete by the end of the calendar year. In addition, Marcus is experimenting with a concept it's calling Big Screen Bistro, converting three of its auditoriums into dining rooms where customers can enjoy a meal while watching a movie. If you think it's a strange concept, think again. The Alamo Drafhouse in Austin, Texas, has been doing this with great success since 1997.

Hotels and Resorts
Marcus owns and/or manages 18 hotels in nine states. This past year was very healthy indeed. Positives in 2011 include a 9.6% increase in revenues, a 370% increase in operating profits, a 10.4% increase in revenue per available room (RevPAR) and a 3% increase in the average daily rate for the third quarter - the second consecutive quarterly increase. These are all signs the lodging industry is continuing to improve and get healthy. For additional proof, one needs look no further than the second quarter results for Hyatt (NYSE:H), Marriott (NYSE:MAR) and Choice Hotels International (NYSE:CHH). Their RevPAR's were impressive. Consistent with previous economic downturns, occupancy rates eventually rise and then room rates follow. That's happening now. With $129 million available under its credit facility and the business recovering, it's now in a position to go after additional management contracts and potential equity positions in those properties. With limited supply growth in the near term, should the economy improve, Marcus will clearly benefit from higher rates. Representing just 16% of total operating income, however, it definitely plays a secondary role to the theater business.

The Bottom Line
In the last 10 years, Marcus' stock's traded below $10 for approximately 60 days. Its current enterprise value is 9 times EBITDA while the five companies mentioned in the two previous paragraphs average a multiple of 11. Like I said, it's priced to move. (For additional reading, check out The Ups And Downs Of Investing In Cyclical Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center