Image Source: Dan
Executive Summary – Marcus Corp has done well in establishing itself as a meaningful regional player in the movie theater market, and its ability to outperform the industry in terms of box office results and profitability in its movie theater operations–thanks in part to its solid portfolio of owned real estate–is impressive. However, inconsistent free cash flow generation and a notable debt load give us some reason for pause, as does its weak Dividend Cushion ratio, and we see little valuation opportunity present in shares at this time. Schneider National Trucking operates a broad portfolio of freight transportation and logistics solutions that appear to be positioned well for profitable growth thanks to a diversified customer base, the proliferation of e-commerce, and potential margin-expanding initiatives. We generally prefer the business models of more asset-light peers, however, as the company’s free cash flow generation suffers due to the capital intensity of maintaining of a fleet of owned transportation equipment. We’re expecting ongoing expansion in its cash flow generating capacity, as a result of ongoing cash flow from operations expansion and lower capital spending in the near term, but shares of Schneider are trading firmly in the upper half of our fair value estimate range at the moment.
By Kris Rosemann
Marcus Corp (MCS) – Marcus Corp operates in two business segments: ‘Movie Theaters’ and ‘Hotels and Resorts.’ As of the end of 2016, it operated 68 movie theaters with 885 screen across the Midwest and Great Plains regions, as well as eight wholly- or majority-owned hotels and resorts and 10 hotels and other properties owned by third parties. Its theater division is its oldest and most profitable, accounting for ~60% of total revenue with an operating margin of ~22% in 2016. Its ‘Hotels and Resorts’ segment’s operating margin came in at 6.8% in 2016, and such a difference in profitability causes the operating income breakdown to be ~86% from ‘Movie Theaters’ and ~14% from ‘Hotels and Resorts.’ Its movie theaters have outperformed the industry for 13 of the last 14 quarters in terms of box office results, including 6.4% outperformance in 2016 and 2.2% through the first half of 2017. This segment also boasts industry-leading EBITDA margins that routinely come in the high-20s range, compared to the 15%-22% range for larger competitors such as AMC, Regal, and Cinemark. The company’s portfolio of real estate sets it apart from peers, as it owns roughly 80% of its theaters, compared to just 9% ownership among its peer group.
Image shown: The performance of Marcus Corp since the beginning of 2017.
We currently value shares of Marcus Corp at $25, with a fair value range of $20-$30–shares are trading at $27.30 as of this writing. We’re expecting ongoing top-line expansion as management works to enhance marketing and operating strategies as well as pursue growth via acquisitions, to which it is no stranger–over 50% of its existing movie theater circuit came from acquisitions. We also anticipate modest expansion in EBITDA margin, which has climbed steadily to 20.6% in 2016 from 17.8% in 2013. We’re not particularly fond of Marcus’ balance sheet, which holds just over $320 million in net debt as of the end of the second quarter of 2017. This comes to a net debt-to-EBITDA (TTM) ratio of ~2.6x, a manageable level, but one worth keeping an eye on as additional acquisitions and potentially capital-heavy growth plans are pursued. Such a debt load becomes increasingly concerning after considering Marcus’ free cash flow generation of -$1 million (negative $1 million) in 2016. The company has been free cash flow positive in most recent years (a change in its fiscal year end makes comparisons difficult), though only marginally so, and free cash flow coverage of dividends paid has been very tight when present. The company registers a Dividend Cushion ratio of -0.5 as a result of its less than ideal free cash flow generation and notable debt load. Shares yield ~1.85% as of this writing and are trading at ~18.7 times 2017 consensus earnings estimates.
Media – Entertainment: CNK, DIS, IMAX, ISCA, LYV, MSG, NWSA, RGC
Schneider National Trucking (SNDR) – Fresh of its IPO in April 2017, Schneider National Trucking is a transportation and logistics services company with a broad portfolio of truckload, intermodal, and logistics solutions with one of the largest for-hire trucking fleets in North America. It boasts scale advantages across all of its operating segments: ‘Truckload,’ ‘Intermodal,’ and ‘Logistics,’ and such a characteristic gives drivers and shippers more options, ultimately increasing retention among both parties. ‘General Merchandise’ accounts for roughly one-third of its end-market footprint, with ‘Consumer Products Goods’ and ‘Food & Beverage’ each coming in at ~11%. We like its broadening and diversified customer base, which includes more than 40% of the Fortune 500, and its top ten customers accounted to ~30% of 2016 revenue, down from 38% in 2011. The company is working to digitize its value chain, and it continues to invest in varying data sources that enable it to use, predictive, preventive, and prescriptive analytics, which it believes will be a material driver of margin expansion moving forward. Management is working to create a differentiated offering on first-to-final mile for difficult-to-handle products, an area that is growing with the rapid rise of e-commerce. Schneider claims its offerings make it the leader in e-commerce driven first-to-final mile, something that should continue to drive growth for years to come.
Image shown: The performance of Schneider National Trucking since its initial public offering.
We currently value shares of Schneider at $23 per share, with a fair value range of $18-$28 when considering a margin of safety of 20%–shares are trading at $26.64 as of this writing. We’re expecting Schneider to continue growing its revenue at a solid mid-single-digit pace in coming years, as well as strong operating margin expansion on the back of scale advantages and operational efficiencies. The firm’s balance sheet is reasonable, with net debt (inclusive of capital leases) coming in at ~$143 million as of the end of the second quarter of 2017 (Adjusted EBITDA in the first half of 2017 was ~$249 million, suggesting financial leverage is not an issue). Free cash flow has been poor in recent years–purchases of transportation equipment are not minor by any stretch of the imagination–and came in negative in both 2014 and 2016, despite cash provided by operating activities rising to ~$455 million in 2016 from just over $345 million in 2014. We’re looking for this growth trajectory in cash from operations to continue in coming years as top-line growth opportunities are available and margin expansion is pursued, and expectations for shrinking capex in 2017 should help free cash flow generation. On the basis of these forward looking expectations, the firm scores a solid Dividend Cushion ratio, but shares currently yield less than 0.8%, suggesting its strong dividend ratings may be more a function of its very low annual dividend obligations (the denominator of the Dividend Cushion). Management expects near-term market conditions to continue improving, and it has set 2017 adjusted diluted earnings per share guidance in a range of $0.94-$1.02, which translates to a price-to-earnings ratio of more than 26 times. We’re not so sure a company with such capital intensive operations should garner such a lofty multiple. Growth opportunities may be present, but such a multiple implies far more impressive growth than we anticipate Schneider experiencing in coming years.
Air Freight & Logistics: CHRW, EXPD, FDX, FWRD, HTLD, JBHT, ODFL, HUBG, SWFT, UPS, WERN
Related: AMC, HMNY