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The Walt Disney Company will infuse $60 billion into its DPEP division–Parks, Experiences, and Products. And while that could be the best news Disney Parks fans have ever heard, some Wall Street analysts and investors have very different feelings about Disney’s latest strategy.
Credit: Becky Burkett
On Tuesday, The Walt Disney Company hosted many of Wall Street’s finest at the Walt Disney World Resort near Orlando, Florida, for its 2023 investor event. This year’s summit was heavily focused on the growth of Disney’s Parks, Experiences, and Products division, including the plans the company has for boosting that growth.
Though it wasn’t the only thing discussed during the event, the main takeaway was that Disney is planning a massive investment in the division that encompasses Disney’s theme park business, Disney Cruise Line, Adventures by Disney, Disney licensed merchandise, and more. And Disney apparently defines massive in this scenario as “equal to $60 billion.”
Over the next decade, the company will spend $60 billion on turbocharging the division to boost growth and stay ahead of the competition. That’s more than twice as much as the amount spent across the division in the last ten years.
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Disney’s announcement came as an accompanying 8-K report was filed with the Securities Exchange Commission (SEC), which stated Disney’s strategy includes “investing in expanding and enhancing domestic and international parks and cruise line capacity, prioritizing projects anticipated to generate strong returns, consistent with the Company’s continuing approach to allocating capital in a disciplined and balanced manner.”
The filing further stated that money for the massive investment will come from a variety of sources, including “other liquid assets, operating cash flows, access to capital markets, and borrowing capacity under current bank facilities.”
Disney says part of the expansion of the DPEP division will allow the company to “explore even more characters and franchises, including some that haven’t been leveraged extensively to date” at the entertainment giant’s parks around the world.
Such an investment is a testament to Disney management’s optimism about the power of the parks and experiences division to be a driving force for the growth and continued success of The Walt Disney Company. And according to Doug Creutz, an analyst with TD Cowen, that optimism is perfectly reasonable.
Credit: Becky Burkett
“It’s a big investment, but it’s also already a big business,” Creutz wrote in a report. “Disney management expressed a strong belief that DPEP can continue to be a major growth driver for Disney in the future. Their optimism is reasonably based on high historical return on investments (ROIs) for the segment, a (somewhat surprising to us) amount of still undeveloped land at their existing parks, and opportunities to meaningfully expand their cruise and vacation club ‘Signature Experiences.’”
According to Creutz, Disney’s investment has the potential to “drive mid- to high-single-digit percentage annual earnings before interest and taxes (EBIT) growth at DPEP over the next 10 years, assuming future ROIs are comparable to levels seen over the past 10 to 15 years.”
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Other analysts, however, aren’t so sure about Disney’s ROI, and for them, Disney’s announcement is concerning, according to Wells Fargo equity analyst Steven Cahall, who described some of the attendees at Tuesday’s Investor Day event as “a bit frustrated.”
“The spending guidance is out there, but it’s unclear if Parks earnings growth should accelerate alongside spending growth,” Cahall said.
The hope is that Disney’s earnings will grow with the growth of the company’s spending–the old “takes money to make money” adage. If the opposite happens, such a dramatic increase in Disney’s spending–to achieve the major expansion across Disney’s parks and cruise line, among other areas–will ultimately damage Disney’s free cash flow–something no one on Wall Street wants to see happen. According to Indie Wire, that may be part of the reason for the drop in Disney’s stock from nearly $85 per share on Monday evening to as low as $81.80 Wednesday morning.
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When it comes to revenue, Disney’s media and entertainment division is nearly twice the size of its parks and experiences division. But when it comes to actual profits, Disney’s parks division is the bigger of the two. A surge in parks profits, especially at Disney’s international parks, and Disney’s troubled linear television model account for both.
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Wells Fargo’s Cahall says he foresees Disney+ being “profitable earlier and more strongly than consensus.” Cahall liked Disney CEO Bob Iger’s emphasis on what he touted as a “renewed focus on IP improvement,” which is the name of the game at Disney, whether in regard to Disney Parks or to the company’s media and entertainment content.
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Analysts for Barclays, however, see problems with Disney’s newly unveiled decade-long strategy.
“Expanding parks and cruises tends to be a multi-year undertaking as a result of which, revenue and margin acceleration lags the investment cycle,” Barclays analysts said. “The struggle for investors may be to match their investment horizon with the return horizon of the company’s plan.”
Additionally, some analysts in attendance at Tuesday’s Investor Day summit said that many investors were disappointed with the lack of updates shared by the company as they relate to the sale of ABC networks, upcoming negotiations with Comcast about selling Hulu, and the ongoing Hollywood strikes.
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Needham analysts had an additional concern–that Disney based its decision to infuse billions into expanding the parks division on what they deem “unsustainable and elevated profit margins.”
Barclays analysts, however, acknowledge that Disney faces stiff competition, especially when it comes to its theme parks, and additional spending could be key in helping the company to face and beat that competition in the United States, especially as Universal recently opened Super Nintendo World in California and has plans to open Epic Universe in Central Florida in Summer 2025.
“Disney will likely face more competition, and some of this investment may also be intended to deal with this competitive backdrop,” Barclays said.
