Disney (NYSE:DIS) has expanded and made some changes to its Magic Kingdom theme park in Florida that are aimed at reducing wait time for customers and increasing overall sales. According to an estimate, Disney might have spent close to $300 million on this makeover. ((Disney World’s $300 Million Makeover Means No Waiting for Dumbo, Bloomberg, Dec 6 2012)) That’s a huge amount and the obvious question is – is it worth it?
We estimate that Disney’s Magic Kingdom Florida constitutes just 2% to Disney’s value, thus making it a business worth $2 billion as per our estimate. For such a business, a $300 million investment seems quite expensive. Nevertheless, this is something that Disney cannot really avoid being a consumer-focused company. Theme parks are a great way to connect with consumers and cross-market other company products. Disney can promote movies, sell consumer goods, promote TV programming as well as online and other games through its theme parks.
The Magic Kingdom in Florida is the world’s biggest theme park with close to 17 million in annual attendance.  Given that this theme park contributes roughly 25% to Disney’s overall U.S. theme park attendance of close to 70 million, we estimate its revenues to be around $2 billion. This assumes average per capita guest spend of $114 that we forecast for 2012. Using this figure and an estimated 10% contribution by Disney’s U.S. theme parks & hotels to the company’s value, we conclude that Magic Kingdom Florida constitutes just 2% to Disney’s overall value. This is a very small figure given the big numbers that we just talked about. Why is that? It is all because of high capital expenditures that significantly reduce the theme parks’ cash flows. And that’s precisely the point to consider given the recent development.
Even though Disney’s parks & resorts garner a lot of media attention, the value creation is very less when seen in the context of the whole company.
Our price estimate for Disney stands $54.60, implying a premium of more than 10% to the market price.Notes:
- Global Attractions Attendance Report – 2011 Theme Index, TEA and AECOM [↩]