Theme Parks and Resorts Provide Stable Cash Flows to Disney

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DIS: Walt Disney logo
DIS
Walt Disney

Disney‘s (NYSE:DIS) theme parks have generated stable cash flows for the company over the past few years. Its U.S. properties account for about 15%-20% of its stock value, according to our estimates. The value contribution is relatively low despite the fact that Disney earns approximately 25% of its revenues from its U.S. theme parks. This can be attributed to high capital expenditure associated with this business. Disney incurs huge expenses to maintain these parks as well as upgrade them time-to-time with new rides. Theme parks have benefited from strong attendance and higher per capita guest spending driven by higher ticket prices, which have fueled their revenue growth in recent years.

In 2013, theme parks generated revenues of $11.58 billion and EBITDA of close to $3.3 billion, representing margins of around 29%. [1] We expect the attendance as well as per capita guest spending growth to continue in the coming years, primarily due to higher consumer spending and continued increases in ticket prices. Moreover, the company has made continuous efforts to bring in new rides, which attracts first time as well as repeat visitors.

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How are Disney’s U.S. Theme Parks and Resort Operations Trending?

Higher Attendance and Guest Spending Boost Theme Parks Revenues

Disney is the largest theme park operator in the world, attracting over 132 million visitors in 2013. The Magic Kingdom at Walt Disney World in Florida remains the most visited theme park in the world with 18.6 million visits in 2013, representing year-over-year growth of 6%. [2]

Disney’s U.S. theme parks witnessed stable growth in attendance as well as per capita guest spending over the past few years. Per capita guest spending has increased from $95 in 2009 to an estimated $124 in 2013. This can be primarily attributed to higher ticket prices and a growth in domestic consumer spending. Similarly, attendance also went up from 70 million in 2009 to 75 million in 2013. [1] This growth was driven by the improving U.S. economy and Disney’s investment in new attractions within its resorts. The company is now developing Avatar Land based on the hit movie Avatar at the Animal Kingdom park. Avatar Land is part of the largest expansion in the history of the Animal Kingdom. [3] The new rides and development help attract repeat visitation to the theme park.

Since theme parks are a  destination for leisure activities, per capita guest spending and attendance is somewhat linked to the state of the economy and overall consumer spending, which has been on an uptrend. It has moved from $10,373 billion in January 2011 to $10,912 billion in January 2014. [4] We expect the growth to continue and estimate Disney’s U.S. theme parks attendance to reach above 95 million by the end of our forecast period. We estimate per capita guest spend to grow at an average annual rate of 4% to $164 by 2020. This will translate into annual theme parks revenues of over $10 billion towards the end of the decade.

There is a 10% potential upside to our price estimate if per capita guest spending grows at a higher pace to around $200 and the attendance also grows above 100 million by 2020.  Similarly, there could be a downside risk of over 5% if the per capita spend and attendance remain rangebound around $130 and 80 million respectively.

Per Room Guest Spend in Resorts is on an Uptrend

Disney’s resorts offer rooms for its guests in the theme park. These resorts are quite popular among theme park visitors and generate more than $2 billion in annual revenues.  Like any other hotel business, Disney’s resorts operations are primarily driven by the occupancy levels and guest spending. While the occupancy levels have come down from 86% in 2009 to 79% in 2013, per room guest spending has grown from $215 to $270 between 2009 and 2013. [1] We expect continued growth in per room guest spending and a rise in occupancy levels driven by improving macroeconomic conditions. We estimate the guest spending to grow to $380 and occupancy levels to reach 86% by 2020. This will translate into annual resort revenues of around $3.5 billion towards the end of our forecast period.  An improving economy encourages consumer spending, and the same will be reflected in growth in average guest spending at Disney’s resorts. Even though spending on basic needs remains more or less constant, spending on leisure activities such as resorts and hotels gets notably impacted with economic recovery.

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Notes:
  1. Disney’s SEC Filings [] [] []
  2. 2013 represents the fourth straight year of growth since the worst of the Great recession, 2013 Global Attraction Attendance Report, Pg-25, Themed Entertainment Association []
  3. Avatar Land Addition to Benefit Disney’s Theme Park Business, Trefis, Oct 16, 2013 []
  4. U.S. Consumer Spending, Trading Economics []