What Will Drive The Growth For Disney’s U.S. Resort Operations?

Disney’s (NYSE:DIS) U.S. resort operations have been trending well for the past few years. The company currently offers around 31,000 guest rooms in its U.S. theme parks. Hotel operations primarily depend on two factors, occupancy rate and average per room spending. Disney has seen a steady growth in room spending over the past few years led by a better macro-economic environment and development of new rides at its theme parks. However, the occupancy rates have declined since the recessionary period. While we expect the occupancy levels to stabilize around the current levels, room spending will continue to grow at a steady pace in the coming years. On that note, we discuss below the trends in Disney’s hotel operations and what will drive its growth in the coming years.

We estimate revenues of around $52.65 billion for Disney in 2015 and EPS of $4.90, which is in line with the market consensus of $4.46-$5.08, compiled by Thomson Reuters. We currently have a $105 price estimate for Disney’s shares, which is close to the current market price.

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Trends In Disney’s Hotel Operations And Our Forecast

Disney currently offers more than 31,000 rooms or 10 million room nights annually in the U.S. The room revenues for Disney’s hotel properties have been on an uptrend over the past few years, increasing from a little over $1.80 billion in 2010 to $2.50 billion in 2014. ^[1] This can largely be attributed to a steady growth in average room spending, which increased from $227 to $283 during the same period. However, occupancy rates have declined since the recessionary period and are still below the pre-recession levels. The figure was around 90% in 2007 and it stood at 85% in 2014. Going forward, we expect the occupancy rates to stabilize around the current levels and room spend to grow to around $400 levels by the end of our forecast period. This will translate into hotel revenues $3.50 billion and an estimated EBITDA margin of 34% for Disney’s hotel and parks will translate into EBITDA of $1.20 billion, representing around 5% of the company-wide EBITDA. The contribution will be slightly higher if we include Disney’s international hotel operations.

What Will Drive This Growth?

Our optimistic outlook for this segment is primarily driven by growth in the U.S. economy, increases in international tourism and development of new rides at Disney’s theme parks. These factors will contain the fall in occupancy levels as well as drive average room spending higher at Disney’s properties. As the U.S. economy stabilizes, disposable personal income is expected to improve. This would give rise to the demand for luxuries including travel, leisure, entertainment etc. The hotel as well as the theme park industry can be linked to the disposable personal income of consumers. The U.S. disposable personal income has been on an uptrend over the past few years and has moved from a little over $11,500 billion in January 2011 to over $13,260 billion in January 2015. ^[2] The chart below, complied by Trading Economics,  shows the growth in the U.S. disposable personal income. The U.S. GDP is also seeing strong momentum with projected growth of around 3% in 2015 and 2016. ^[3] Moreover, a recovery in global economies and sophisticated financial markets of emerging economies are driving growth in international travel. According to Office of Travel & Tourism Industries, the U.S. visitation in 2014 has increased 7% to 74.72 million as compared to the prior year. ^[4]

Growth In Theme Parks Attendance Will Drive The Demand For Disney’s Hotels

One of the most important drivers for Disney’s hotel operations remains its theme parks. 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%, according to the latest data available with the Themed Entertainment Association. ^[5]

The attendance at Disney’s U.S. theme parks has also been on an uptrend and went up from 70 million in 2009 to 77 million in 2014. ^[1] This growth was driven by an improvement in the U.S. economy and Disney’s investment in new attractions within its resorts. We believe these factors will continue to drive visitation in the coming years. The company is currently developing Avatar Land based on the hit movie Avatar at the Animal Kingdom park. It will also bring Star Wars and Frozen attractions into its theme parks. The new rides and development help attract repeat visitation to the theme park.  Given these trends, we estimate the attendance will grow to 80 million in 2015 and over 100 million by the end of our forecast period. The attendance growth at the theme park will also drive the demand for Disney’s hotels located in these theme parks.

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1. Disney’s SEC Filings [↩] [↩]
2. United States Disposable Personal Income, Trading Economics [↩]
3. OECD slashes forecast for Canadian economy, blaming oil price declines, The Star, March 23, 2015 [↩]
4. Non-Resident Arrivals to the United States: Overseas, Canada, Mexico & International, Office of Travel & Tourism Industries [↩]
5. 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 [↩]