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A Good Small Cap Bet on Movie Theatre and Lodging Business: The Marcus Corporation (MCS)

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Mario Gabelli, a famous investment manager, has recently shown his interest in the theater business. On Jan. 8he increased his stake by nearly 23.5% in The Marcus Corporation (NYSE: MCS) to own 743,113 shares in the company. On the same day, Marcus announced a buyback program to purchase up to 3 million shares. Should investors follow Gabelli into Marcus now? Let’s find out.

The Marcus Corporation (NYSE:MCS)Business Snapshot

Marcus, the 6th largest theater operator in the US, is operating in two main business segments, including movie theaters and hotels and resorts. It owns 56 movie theaters with 694 screens in several states such as Nebraska, Minnesota, and Iowa. In addition, it is the owner of 8 hotels and operates 18 hotels and resorts with more than 4,700 rooms under several brands, including Pfister, Hilton Madison, Grand Geneva Resort & Spa, Hotel Phillips, etc. The largest revenue source for Marcus was theater admissions with $142 million in revenue, accounting for 34.3% of the total revenue in fiscal year 2012. Room revenue ranked second, with about $94.9 million, representing nearly 23% of the total sales.

Most Reasonable Debt Level

In the last 5 years, Marcus has experienced a gradual increase in its top line, from $371 million in fiscal year 2008 to $414 million in fiscal year 2012. During the same period it has kept paying consistent dividends. Since 2008, Marcus has generated positive cash flow. Trailing twelve months, its operating cash flow and free cash flow were $70 million and $39 million, respectively. Like other lodging and theater businesses, including Marriott International, Inc. (NYSE: MAR) and Regal Entertainment Group (NYSE: RGC), Marcus employed high but manageable debt levels in its operations.  As of November 2012, it had $337 million in total stockholders’ equity, $10 million in cash, and $221 million in long-term debt, which represented around 29.2% of the total asset. The Debt to Equity ratio was 0.7x and the interest coverage was comfortable at 5x. Both Marriott and Regal had negative book values and higher long-term debt level than Marcus. The long-term debt of Marriott and Regal accounted for 35.8% and 87.1% of their total assets, respectively.

Share Repurchase and High Insider Ownership

Recently, the company announced the repurchase program to buy back 3 million shares, additional to the 955,000 shares remaining under prior authorizations at the end of 2012. For the last 12 months, Marcus has bought back around 1.8 million shares. Gregory Marcus, the Company’s President and CEO, said: We continue to believe that repurchasing our shares is a good investment for the company. With our strong cash flow and balance sheet, we believe that when timing and market conditions are appropriate, we will be able to repurchase shares to enhance shareholder value while at the same time continuing to invest in our businesses to facilitate our long-term growth.

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