We’re cautiously optimistic about Disney ‘s (DIS) decision to invest billions upon billions more into its booming theme parks. On one hand, it could help profits over time. On the other, it could stretch its balance sheet in the near term. And, all the while, CEO Bob Iger is attempting a company turnaround that’s taking much longer than anyone expected. It’s a tricky time for Disney to be nearly doubling the company’s capital expenditures in its Disney Parks, Experiences and Products (DPEP) business segment to $60 billion over the next 10 years. This investment comes at a time when Iger is facing pressure from its lagging linear television business as consumers are cord-cutting or canceling their cable and satellite subscriptions to migrate to streaming. Sure, the parks unit, which includes cruises, is firing on all cylinders post-Covid. However, Wall Street seems to only care about streaming — specifically, how much will Disney pay to take over Hulu and when will Disney stop the losses in its direct-to-consumer division and start turning profits? Don’t forget, Disney still has to figure out what to do with its linear television networks — a dilemma highlighted by its recent blackout battle with Charter (CHTR). Earlier this month, Disney pulled its programming from Charter’s Spectrum servicer due to a dispute over the financial terms of their carrier fee contract. Disney blocked ESPN and other Disney-owned channels as a result. This dispute, which was resolved in a compromise, shows that Disney has work to do in figuring out its business strategy for its linear networks. Buying the rest of Hulu it doesn’t already own from CNBC-parent Comcast (CMCSA) is expected to be a costly endeavor for Disney, while the company promises streaming profitability by the end of fiscal 2024. Iger said he would explore all strategic options for its linear TV unit, including selling it. He’s been seeking partnerships that would allow Disney to help fund ESPN amid rising sports rights costs but keep control of the sports network. Disney recently struck a deal with Penn Entertainment (PENN) on sports betting. Shares of companies tend to sell off when they have to invest heavily and tend to rally when they reap the benefits of those investments. This has happened in cycles to Club holding Amazon (AMZN), most recently when it invested heavily during the pandemic to meet consumer demand for online purchases. Those ballooning costs eventually weighed on the company’s profits and stock performance stalled. But then shares started to rise when management decided it was time to pull back spending and rationalize costs. Disney shares turned lower Tuesday after disclosing its parks investment on concerns that higher spending could hurt margins. However, the stock did bounce back 1% on Wednesday. The market may have reacted negatively to the Disney’s Park investment news, but we see this as Iger playing to the company’s strengths and a sign that the company’s balance sheet is not in the precarious situation the market makes it out to be in. DIS 5D mountain DIS stock performance. “Investments in parks and experiences have typically delivered a strong return on investment (ROI) and led to sustainable high single-digit to low double-digit operating income compound annual growth rate for U.S. parks,” according to Morgan Stanley. The analysts said it gives them “confidence in the returns from incremental capital spending.” Morgan Stanley has “increased expectations for growth at Disney’s international parks” and the company should benefit from “continued expansion of its cruise business over the next few years.” In a separate note, KeyBanc believes Disney’s DPEP segment has a “bright long-term future” after its analysts attended Disney’s Investors Summit. “DIS is able to engulf fans inside DIS’s stories and monetize its content in ways that are unique,” the analysts wrote. They added the company’s cruise businesses should be “the primary driver of domestic DPEP growth in the near term.” Morgan Stanley believes that “shedding non-core linear assets would leave DIS shares trading at a higher multiple … and shifting the company’s earnings composition further towards Parks & Experiences.” Bottom line Disney’s moat is its strong intellectual property that it can use to monetize and grow its business. Doubling down on investments in parks could help over time. But it could possibly put its financial leverage in a precarious position in the short term. If management decides to exit linear assets, we think that could only bolster the importance of parks. The company needs to make a decision on how to handle the linear side as it evaluates the future of the TV business, which is hurtling toward streaming. (Jim Cramer’s Charitable Trust is long DIS, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Visitors can avoid lines at Disney World if they buy into the system.
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We’re cautiously optimistic about Disney‘s (DIS) decision to invest billions upon billions more into its booming theme parks. On one hand, it could help profits over time. On the other, it could stretch its balance sheet in the near term. And, all the while, CEO Bob Iger is attempting a company turnaround that’s taking much longer than anyone expected.
