We came across a bullish thesis on The Marcus Corporation (NYSE:MCS) on Waterboy’s Substack by Waterboy Investing. In this article, we will summarize the bulls’ thesis on MCS. MCS Technologies, Inc. share was trading at $15.46 as of Oct 7th. MCS’s trailing and forward P/E were 29.62 and 57.14 respectively according to Yahoo Finance.
A movie theater auditorium filled with an audience enjoying a blockbuster film.
The Marcus Corporation (MCS) is a family-owned business with two main segments: movie theaters and hotels. Founded in 1935, it runs 79 theaters (owning 43) with 993 screens, making its cinema division a major revenue source, contributing two-thirds of its total income. Additionally, Marcus owns and manages upscale hotels, with seven fully-owned properties and eight managed for others, totaling 4,400 rooms.
MCS seems like an interesting opportunity because of its strong theater and hotel businesses and its valuable real estate holdings. Despite recent challenges in the cinema industry, including the pandemic-induced shutdowns and the impact of Hollywood’s strike on studio production, Marcus is well-positioned for a recovery. Its theater segment, which generated $2.02 in free cash flow (FCF) per share in 2023, could return to pre-pandemic levels of $3.03 FCF/share over time, reflecting steady demand for cinema and rising box office revenues. Although 2024’s cinema revenue is down 24% year-to-date, the hotel segment has grown modestly by 5%, offering diversification and stability. This balance between the two segments reduces risks, ensuring steady cash flows.
Marcus’ real estate assets, especially its luxury hotels, further reduce investment risk. The company owns seven high-end hotels valued between $300-$500 million, or $9.32-$15.54 per share, based on conservative estimates of hotel valuations per room. This real estate cushion, along with Marcus’ 43 owned theaters, provides a significant safety margin. Notably, Marcus’ market capitalization is $517 million, suggesting the hotels alone could support a large part of the current stock price, making the theater assets almost a bonus. A potential spin-off of the hotel business could unlock more value, leaving Marcus as a cash-generating theater operator with minimal debt.
Marcus trades at just 8x normalized earnings which is significantly less than its peer Cinemark who trades at 11x earnings. This discount seems unjustified given Marcus’ stronger balance sheet, real estate ownership, and ability to handle downturns. The real upside lies in a multiple re-rating, with potential capital returns from dividends and buybacks. If the cinema industry continues to recover and Marcus’ earnings growth speeds up, the stock could re-rate to 12-15x earnings, leading to substantial returns. Overall, Marcus offers a rare mix of downside protection through its real estate assets and significant upside through its theater and hotel businesses, making it an attractive long-term investment with a potential value of $30+ per share.
The Marcus Corporation is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 23 hedge fund portfolios held MCS at the end of the second quarter which was 16 in the previous quarter. While we acknowledge the risk and potential of MCS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MCS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.