Disney Bets $400 Million that Avatar Attractions Will Bring in Crowds

Last week in its press release, Disney (NYSE:DIS) announced that it will be working with Cameron’s Lightstorm Entertainment and News Corp’s (NASDAQ:NWS) Fox to create blockbuster Avatar-themed attractions in its theme parks. Avatar was a blockbuster movie that was released in 2009 in 3D and grossed about $2.8 billion worldwide. The box office earnings demonstrate the widespread popularity of this movie and its fictional Navi people from a foreign world, and it makes sense for Disney to incorporate it in its theme parks. It is not the first time that Disney has created attractions based on movies that are not produced by Disney studios, for instance Indian Jones was distributed by Viacom’s (NYSE:VIA) Paramount Pictures.

The project is expected to cost about $400 million. ^[1] Let’s take a look at how Disney can recoup these costs. We estimate that operating margins (EBITDA) for Disney’s parks and resorts are of the order of 23%, and so this implies that in order to recoup capital expenditures of $400 million, Disney will need to earn incremental revenue of close to $1.75 billion. Let’s assume that Disney will do this over the course of 5 years. This implies that each year it will need to earn incremental $350 million of revenue. Given our estimates of per capita guest spend of little over $100 per year, Disney will need to attract additional 3.5 million customers each year. Can Disney do it? Anything less and Disney will take a longer time to get net returns.

Our price estimate for Disney stands at $46.40, implying a premium of over 50% to the market price.

See our complete analysis for Disney’s stock.

1. Disney to build ‘Avatar’ attraction in theme parks, Yahoo News, Sept 20 2011 [↩]