The U.S. economy seems to be improving as the job market improves with rising employment rates, stocks rallying and credit availability becoming easier. U.S. consumer confidence is on the rise as well if we are to believe Bloomberg Comfort Index, which is at the highest peak in last 4 years.  Like the rising tide that lifts all boats, there can be widespread implications on several industries if the economic improvement continues and the U.S. once again emerges as a global growth engine. We take this opportunity to examine Disney’s (NASDAQ:DIS) parks & resorts business in particular, which is significantly influenced by macro economic changes. Unlike other media companies such as Time Warner (NYSE:TWX), Viacom (NASDAQ:VIA) and News Corp (NASDAQ:NWS), Disney boasts of a vast empire of theme parks and resorts though this surprisingly contributes a small amount to Disney’s overall business value.
Although the parks & resorts business brings a significant amount of revenues for Disney, the margins are low and capital expenditures are high. An improving economy will allow for higher consumer spending that can directly impact discretionary spend and expenditure on leisure activities. This can not only lift number of visitors to Disney’s parks and resorts, but also substantially increase the per capita guest spend. However, even a 10% increase in both these metrics affects Disney’s value.
What can be substantial from the point of view of cash flow generation is that if economy improves and people start flocking to parks & resorts, the incentive for Disney to spend heavily on resort maintenance and enhancement will reduce. If we look at the historical data, we note that as the recession hit the economy in 2008, Disney significantly expanded capital expenditures in subsequent years as its parks & resorts profits fell due to lower attendance and per capita spend. The implication here is that the company is spending to draw in customers and in a rising economy, it may not need to work as hard to attract its guests.
Now if the company can bring down these incremental expenses provided the economy rebounds substantially, there is tremendous value to unlock. We think that a combination of increased attendance, increased per capita guest spending and reduced capital expenditures can lift our price estimate for Disney by roughly 10%.Notes: