Disney: Increased Capital Investment in Theme Parks Builds on Key Competitive Advantages

Disney DIS announced firm plans to invest over $60 billion in its theme parks, resorts, and cruise business over the next decade, roughly double the investment in the segment historically. Management had been hinting at increased capital spending since May by disclosing that the firm would spend $17 billion to expand the Orlando resort and add three new cruise ships during fiscal 2025 and 2026. As a result, we were already projecting elevated capital spending of $5.8 billion on average from fiscal 2024-2028 versus an average of $4.4 billion from fiscal 2018-2022. Given the longer timelines for these capital-intensive projects, we expect spending will skew toward the end of this period. We are maintaining our $145 fair value estimate.

While the parks segment is capital-intensive, its performance has been a relatively bright spot for Disney during recent trying times. While certainly not a straight line thanks to the pandemic, revenue for the parks, experiences, and products segment expanded by 6% annually on average from fiscal 2017 to 2022. Segment operating income improved by 8% on average, as the segment operating margin increased from 25% to 28%. Operating income for the segment has quadrupled over the last decade while aggregate investment increased by three times, implying an improved return on capital investment.

Beyond the financial impact, we view the theme parks and cruise ships as integral pieces to Disney’s wide moat. Disney uses its parks and ships to expand the reach and impact of its key franchises and characters without burning them out by being in too many movies or shows. We expect a significant position of the increased capital spending will be allocated to creating new experiences and lands centered around newer franchises and characters.