The Walt Disney Co. hosted Wall Street representatives at Walt Disney World Resort in Orlando early this week for the Hollywood conglomerate’s 2023 investor summit focused on the Disney Parks, Experiences and Products (DPEP) unit, led by its theme parks.
At a time when much debate has centered on Disney’s future ownership and plans for streamer Hulu and the potential sale of ABC and linear TV assets, the investor gathering explored such topics as the DPEP segment’s post-COVID pandemic’s growth and profitability outlook, visitor and spending trends, new theme park attractions and investment in the firm’s cruise ships business. Disney also touted a major expansion of its DPEP business with a vow to invest $60 billion over the next 10 years to turbocharge growth in the lucrative unit, nearly doubling its spending over the prior 10-year period.
“It’s a big investment, but it’s also already a big business,” TD Cowen analyst Doug Creutz summarized his takeaways on the initiative in a report. He has a “market perform” rating and $94 price target on Disney’s stock.
“Disney management expressed a strong belief that DPEP can continue to be a major growth driver for Disney in the future,” the expert wrote. “Their optimism is reasonably based on (1) high historical return on investments (ROIs) for the segment, (2) a (somewhat surprising to us) amount of still undeveloped land at their existing parks, and (3) opportunities to meaningfully expand their cruise and vacation club ‘Signature Experiences’.”
Creutz estimated that the planned investment “could drive mid- to high-single-digit percentage annual earnings before interest and taxes (EBIT) growth at DPEP over the next 10 years, assuming future ROIs are comparable to levels seen over the past 10-15 years.”
He also highlighted upcoming DPEP projects, including the planned opening of the “World of Frozen” at Disney’s Hong Kong theme park in November, “Zootopia Land” in Shanghai also later this year, “Fantasy Springs” in Tokyo in 2024, funded by Tokyo partner Oriental Land Company, a “Frozen Land” at the Paris park, for which a launch date is yet to be decided), three new cruise ships launching 2024-2026, a new private island cruise port in the Bahamas launching in 2024, and “1,000 new Vacation Club ‘keys’ opening over the next five years,” which Creutz noted means a 15 percent capacity expansion).
“Beyond the projects delineated above, management expects to be flexible in allocating resources, targeting capital expenditures to projects that offer the highest expected returns,” the TD Cowen analyst noted about the financial impact. “Management indicated that the ramp in capital expenditures would be moderate over the next few years (versus our estimate of $3 billion DPEP capital expenditures in fiscal year 2023), but rising over time.”
Bank of America analyst Jessica Reif Ehrlich gave her report the title “Investing in the magic,” analyzing Disney CEO Bob Iger’s work this way: “After spending the past 11 months restructuring Disney and re-evaluating its asset mix, we believe his four key priorities include: 1) direct-to-consumer (DTC) — and driving an improvement in profitability, 2) managing the transition in linear while recognizing the disruption in the business, 3) revitalizing the creative engine that is at the heart of the Disney brand
and 4) turbocharging growth in theme parks.”
She doesn’t see the magic having an impact overnight though. “We expect progress on these priorities
could take several quarters, if not years, to materialize (e.g. improving film is a longer-term endeavor) but given Bob Iger’s track record and stature in the media industry, we continue to believe his steady leadership bodes well for the future performance of Disney.”
While reiterating her “buy” rating on Disney shares, Reif Ehrlich lowered her price target by $25 to $110, noting that this was “in line with Disney’s historical premium to the S&P500 and reflects the transition underway for Disney and the media industry more broadly.” As near-term catalysts, she identified “additional updates on the strategic outlook for Disney and continued robust theme park demand.”
Speaking of theme parks, the Bank of America expert’s takeaways from Disney’s DPEP investor event were as follows. “The recovery in Disney theme parks post-COVID has been astounding as both revenue and operating income are well ahead of pre-pandemic levels. However, the recent bounceback spotlights what had already been strong financial performance in theme parks over the past decade. … However, there appears to be ample runway to continue to invest and grow the business.”
One data point Reif Ehrlich highlighted: “There is still a 700 million addressable market (as identified by income and Disney affinity), so for every one park guest there are 10-plus consumers with a Disney affinity who do not visit the parks. As a result, Disney will lean into this opportunity and invest $60 billion into theme parks and experiences over the next decade, funded by existing free cash flow.” The analyst predicted a financial payoff, writing: “Given the return profile of these businesses, we believe the increased investments are prudent to drive sustained longer-term growth.”
Wells Fargo analyst Steven Cahall, who has an “overweight” rating and $110 stock price target on Disney, making it a “signature pick” for his firm, wrote that he also liked what he heard. “Disney’s investor summit showed the company’s bullishness on parks/cruises, which remain among the best and most unique assets in media,” he highlighted in his report. “However, Disney is a complex story, and we think direct-to-consumer profitability remains the real key to unlocking future value.”
The expert also pointed out that investors had hoped for more guidance. “While Disney is bullish on the parks opportunity, investors left the event a bit frustrated on what it all means for returns,” Cahall suggested. “The spending guidance is out there, but it’s unclear if parks earnings growth should accelerate alongside spending growth. If earnings stay unchanged, then higher capex = lower Street free cash flow.” That said, the analyst also noted that management “did indicate confidence that parks will generate ‘strong free cash flow,’ the capital expenditure build is slow/discretionary, and the balance sheet is healthy.”
But his bullishness on Disney is all about streaming and content. “We still believe the real reason to own Disney here is that content is under-monetized on direct-to-consumer (DTC) given the valuable library and relatively low average revenue per user on Disney+ and Hulu,” Cahall wrote. “We think DTC will be profitable earlier and more strongly than consensus. Bob Iger discussed a renewed focus on IP improvement, which underlies the terminal value of Disney reflected in parks and DTC — the vast majority of the stock’s value.”
Morgan Stanley analyst Benjamin Swinburne has an “overweight” rating and $105 stock price target on Disney, meaning upside potential of about 30 percent.
Discussing the DPEP investor summit in a report, he addressed the $60 billion capital spending plan over the next decade. “This is expected to be self-funded by the parks business and aimed at both expanding capacity at its parks and resorts globally and investing in technology to help improve returns,” Swinburne emphasized. “The capital expenditure will likely scale up gradually over time, leaving no material impact to free cash flow expectations in ’23 and ’24. For perspective, after layering in this higher capital spending outlook, we forecast DPEP capital intensity of 13-15 percent over the next decade, similar to the prior decade (excluding the pandemic years).”
Noting that “the Parks & Experiences businesses account for 75 percent of fiscal year 2023 segment operating income at Disney, he called them “uniquely attractive in long-term growth potential, scale, and returns, warranting a low double-digit earnings before interest, taxes, depreciation and amortization (EBITDA) multiple.” Added Swinburne: “By implication, at current Disney share prices, Disney’s media (DMED) assets in aggregate are valued at roughly $50 billion, less than one time sales, or 30 percent of Netflix’s current enterprise value.”
The Morgan Stanley expert concluded by highlighting that his $105 Disney stock price target means “a premium to media peers due to its parks business and media monetization growth opportunity.”
Guggenheim analyst Michael Morris had already written a Sept. 15 investor event preview report, entitled: “Cruisin’ the Parks: Digging into Domestic, International, and New Attraction Details.” “Recent data suggests slower activity and continued challenging comparisons domestically and sequentially slower park app downloads internationally,” he had mentioned. “We expect positive commentary on longer-term trends supported by cruise investment, possible domestic footprint expansion, and new international attractions.”
In his discussion of the entertainment giant’s cruise ship business, Morris noted that Disney plans to launch two additional cruise ships in its fiscal year 2025, with a third new ship set to debut in fiscal year 2026. “With a full year of operation in fiscal year 2023, we estimate that cruise lines will comprise about 6.6 percent of total parks revenue, growing to 8.0 percent contribution in fiscal year 2025 ($2.6 billion of $32.5 billion total) and around 9.4 percent in fiscal year 2026 ($3.3 billion),” he forecast.
In his post-event report on Wednesday, Morris summarized key takeaways from management commentary and maintained his “buy” rating and $125 stock price target on Disney. “CEO Bob Iger highlighted a strategic shift from structure repair to growth,” he highlighted. “There are 1,000 acres of available land across all Disney physical properties — equivalent to seven Disneyland parks,” with only 30 percent of Walt Disney World land currently developed.
“Leadership also highlighted more optimally distributed attendance post-COVID as a tool for better managing costs,” the Guggenheim analyst noted, mentioning that management spoke about the opportunity to increase Disneyland California theme park capacity by 50 percent, among other things. “Management will adjust attendance caps to increase parks monetization opportunity.” For example, capacity caps increased 20 percent in the past two years at Walt Disney World, he cited a datapoint shared by Disney’s management team.
