Walt Disney Co. hosted Wall Street representatives early this week at the Walt Disney World Resort in Orlando 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 discussion focused on Disney’s future ownership and plans for streamer Hulu and the potential sale of ABC and linear TV assets, the investor meeting explored topics including the DPEP segment’s growth and profitability prospects following the COVID pandemic , visitor numbers and expenditure. trends, new theme park attractions and investments in the company’s cruise ship business. Disney also touted a major expansion of its DPEP business, pledging to invest $60 billion over the next decade to boost the lucrative unit’s growth, nearly doubling its spending over the past decade.
“It’s a big investment, but it’s also a big undertaking,” TD Cowen analyst Doug Creutz summarized its findings on the initiative in a report. He has a ‘market perform’ rating and $94 price target on Disney stock.
“Disney management expressed strong belief that DPEP can remain a key growth driver for Disney going forward,” the expert wrote. “Their optimism is reasonably based on (1) a high historical return on investment (ROI) for the segment, (2) a (somewhat surprising to us) amount of undeveloped land in their existing parks, and (3) opportunities to meaningfully to expand their cruise and holiday club ‘Signature Experiences’.”
Creutz estimated that the planned investment “could deliver mid- to high-single-digit annual earnings before interest and tax (EBIT) growth at DPEP over the next decade, assuming future ROIs are similar to the levels of the past 10 to 15 year. years.”
He also highlighted upcoming DPEP projects, including the planned opening of “World of Frozen” at Disney’s Hong Kong theme park in November, “Zootopia Land” in Shanghai, also later this year, and “Fantasy Springs” in Tokyo in 2024, funded through Tokyo. partner Oriental Land Company, a ‘Frozen Land’ in the Paris Park, for which a launch date has yet to be set), three new cruise ships coming into service in 2024-2026, a new cruise port on a private island in the Bahamas that starting in 2024, and “The opening of 1,000 new Vacation Club keys over the next five years,” which Creutz says represents a 15 percent capacity expansion).
“In addition to the projects outlined above, management expects to be flexible in allocating resources, focusing capital expenditures on projects that deliver the highest expected returns,” the TD Cowen analyst noted of the financial impact. “Management indicated that capital expenditure increases would be moderate over the next several years (compared to our estimate of $3 billion in DPEP investments in fiscal year 2023), but would increase over time.”
bank of America analyst Jessica Reif Ehrlich titled its report “Investing in the Magic,” analyzing the work of Disney CEO Bob Iger this way: “After spending the past eleven months restructuring Disney and reevaluating its asset mix, we believe its four most important priorities are: 1) direct-to-consumer (DTC) – and ensure improved profitability, 2) manage the transition linearly while recognizing the disruption in the business, 3) reinvigorating the creative engine which is at the core of the Disney brand and 4) driving growth in theme parks.”
However, she doesn’t see the overnight impact of magic. “We expect it may take several quarters, if not years, for progress on these priorities to materialize (for example, improving film is a longer-term effort), but given Bob Iger’s track record and stature in the media industry, we continue to believe that his stable leadership bodes well for Disney’s future performance.”
While reiterating her buy rating on Disney stock, 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 a near-term catalyst, she identified “additional updates on the strategic outlook for Disney and continued robust demand for theme parks.”
Speaking of theme parks, the Bank of America expert’s takeaways from Disney’s DPEP investor event were as follows. “The post-COVID recovery at Disney theme parks has been astonishing, as both revenue and operating income are well above pre-pandemic levels. However, the recent rebound highlights what has already been strong financial performance in theme parks over the past decade. … However, there appears to be plenty of room to continue investing and growing the company.”
One data point Reif Ehrlich highlighted: “There is still an addressable market of 700 million people (as identified by income and Disney affinity), so for every park guest there are more than 10 consumers with Disney affinity who don’t visit the parks. As a result, Disney will seize this opportunity and invest $60 billion in theme parks and experiences over the next decade, funded by existing free cash flow.” Predicting a financial payout, the analyst wrote: “Given the return profile of these companies, we believe the increased investment is prudent to drive sustainable growth over the longer term.”
Wells Fargo analyst Steven Cahall, who has an “overweight” rating and a $110 stock price target on Disney, making it a “signature pick” for his company, wrote that he also liked what he heard. “Disney’s investor conference showcased the company’s bullish stance on parks/cruises, which continue to be among the best and most unique assets in media,” he emphasized in his report. “However, Disney is a complex story and we believe 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 optimistic about the park’s potential, investors left the event a little frustrated about what it all means for returns,” Cahall suggested. “There are guidelines for spending, but it is unclear whether parks’ profit growth should accelerate alongside spending growth. If earnings remain unchanged, higher capital investment means lower free cash flow on the street.” That said, the analyst also noted that management “expressed confidence that Parks will generate ‘strong free cash flow,’ that capital expenditures are slow/discretionary and that the balance sheet is healthy.”
But his optimism about Disney is all about streaming and content. “We still believe the real reason to own Disney here is the under-monetization of direct-to-consumer (DTC) content, given the valuable library and relatively low average revenue per user on Disney+ and Hulu ,” wrote Cahall. “We believe DTC will achieve profitability sooner and stronger than consensus. Bob Iger discussed a renewed focus on improving IP, which underlies Disney’s ultimate value, reflected in parks and DTC – the vast majority of the stock’s value.”
Morgan Stanley analyst Benjamin Swinburne has an “overweight” rating and $105 price target for Disney, which means upside potential of about 30 percent.
Discussing the DPEP investor summit in a report, he elaborated on the $60 billion investment plan for the next ten years. “This is expected to be self-funded by the parks sector and will focus on both expanding capacity at parks and resorts worldwide and investing in technology to help improve returns,” Swinburne stressed. “Capital expenditures are likely to increase gradually over time, resulting in no material impact on free cash flow expectations in ’23 and ’24. For perspective, after layering these higher investment prospects, we forecast DPEP capital intensity to be 13 to 15 percent over the next decade, similar to the previous decade (excluding pandemic years).
Noting that “the Parks & Experiences business will account for 75 percent of Disney’s fiscal 2023 operating income,” he called them “uniquely attractive in terms of growth potential, scale and long-term returns, which means low earnings before interest justified by double digits. taxes, depreciation and amortization (EBITDA) multiple.” Swinburne added: “This values Disney’s media assets (DMED) at current share prices in total at approximately $50 billion, less than a one-time revenue, or 30 percent of Netflix’s current enterprise value.”
The Morgan Stanley expert concluded by highlighting that his Disney stock price target of $105 “represents a premium to fellow media due to the growth opportunities for the park business and media revenue generation.”
Guggenheim analyst Michael Morris had already written a preview report for the September 15 investor events, titled: “Cruisin’ the Parks: Digging into Domestic, International, and New Attraction Details.” “Recent data points to slower activity and continued challenging comparisons domestically and successively slower park app downloads internationally,” he had said. “We expect positive commentary on longer-term trends, supported by cruise investment, potential expansion of the domestic footprint and new international attractions.”
In his review of the entertainment giant’s cruise ship business, Morris noted that Disney plans to launch two additional cruise ships in fiscal year 2025, with a third new ship set to debut in fiscal year 2026. In 2023, we estimate that cruise lines will account for approximately 6.6 percent of total parks revenues, growing to contribute 8.0 percent in fiscal year 2025 ($2.6 billion of a total of $32.5 billion) and approximately 9.4 percent in fiscal year 2026 ($3.3 billion). prediction.
In his post-event report on Wednesday, Morris summarized key takeaways from management commentary and maintained his ‘buy’ rating and $125 price target for Disney. “CEO Bob Iger emphasized a strategic shift from structural recovery to growth,” he emphasized. “There are 1,000 acres of available land across all physical Disney properties – equivalent to seven Disneyland parks,” with only 30 percent of Walt Disney World land currently developed.
“Leadership also emphasized better distributed attendance post-COVID as a tool to better manage costs,” the Guggenheim analyst noted, noting that management discussed the possibility of increasing capacity at Disneyland California’s theme parks, among other things increase by 50 percent. “Management will adjust attendance limits to increase park revenue generation opportunities.” For example, capacity limits at Walt Disney World have increased 20 percent over the past two years, he cited a data point shared by Disney’s management team.