The politics and competition driving Disney’s high stakes $60 billion theme parks expansion

The next wave of Disney theme park expansion in the U.S. is primed to be in California rather than Florida. It’s a tale of two coasts as the entertainment giant aims to invest $60 billion in its crown jewel parks and cruises over the next decade to help deliver more value to shareholders. In California, the city council in Anaheim — where Disneyland Resort is located — approved last month a company plan to expand the development of its 490-acre campus in Southern California. The final vote on May 7, which coincided with Disney’s latest earnings, paved the way for the biggest expansion there since the companion park, California Adventure, opened more than 20 years ago. The decision requires Disney to put a minimum of $1.9 billion in theme parks, lodging, entertainment, shopping and dining within 10 years. In Florida, Disney has had a more difficult time navigating the political landscape — leading to Disney World development tie-ups. It’s only been a matter of months since a nearly two-year legal fight between the company and Republican Florida Gov. Ron DeSantis came to an end with a settlement in March. The conflict began in 2022 after Disney opposed the state’s so-called Don’t Say Gay law. That led DeSantis and state Republican lawmakers to strip Disney of its decades-old authority to self-govern the district. Another headwind for Disney in Florida is aggressive park competition from NBCUniversal, which is owned by CNBC-parent Comcast . What’s at stake The stakes are high for Disney as it commits to massive investments in parks at a time when CEO Bob Iger faces increased pressure to get a handle on the company’s disparate businesses, which include movies, television, sports, merchandising, and streaming. Since returning to the C-suite in late 2022, Iger has been aggressively cutting costs and restructuring operations. The stock, however, has continued to struggle. Fresh off a victory to keep activist investor Nelson Peltz off the board, Iger must now deliver on his vision to restore Disney’s luster on Wall Street. “It’s smart that Disney keeps investing in its Parks & Experiences business because that’s where the bulk of its profits come from,” said Jeff Marks, the Investing Club’s director of portfolio analysis. In its fiscal 2024 second quarter , Disney’s Parks & Experience division, which includes theme parks, resorts, cruises, hotels, and consumer products grew sales by nearly 10% to $8.93 billion and operating income by more than 12% to $2.29 billion. Roughly 70% of the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is being generated by Parks, which means the rate at which EBITDA is increasing is faster on the Parks side than the rest of the business. Disney’s massive multiyear capital expenditure commitment to Parks and other Experiences will be used to expand theme parks domestically and internationally through new attractions as well as cruise line and hotel capacity — all of which are expected to drive more top-line growth and improve margins over time. Disney has two upcoming cruise ships launching – the Disney Treasure, which is set to sail in December 2024, and Disney Destiny in 2025. To continue to increase Parks and other Experiences revenue, “there are only two things you can do,” said Laurent Yoon, an analyst at Bernstein. “Have more people in attendance and expand capacity.” Yoon estimates the Parks business can grow mid-to-high single digits on a percentage basis in the near term, with EBITDA margins growing to the mid-30s to 40s. Return on invested capital should stay in the high teens to low 20s, which makes “a pretty phenomenal business,” he said. Sunshine State snags Wall Street is bullish on Disney’s parks business. But, in addition to the chilly relationship with DeSantis and Florida officials on further development, Universal is turning up the heat in Orlando with its upcoming Epic Universe theme park, which is set to open in 2025. Epic will have five themed worlds on 750 acres of land. “There are good reasons to be cautious about Disney’s short-term revenue growth once Epic Orlando is opened,” said Peter Supino, an analyst at Wolfe Research. He referenced that back in 2010 when Universal launched Harry Potter World in Orlando, attendance slowed in Disney World. After an initial bump when Epic opens, Supino expects things to “settle into a duopoly market in Orlando.” “Comcast’s exposure to, and reliance on the Theme Parks segment is about to expand dramatically,” according to MoffettNathanson. “Epic Universal signals a new phase in the Theme Park wars.” While calling Disney the “undisputed destination leader” in parks, MoffettNathanson added that “one can’t help but conclude that Epic will necessarily siphon off at least some of the demand … that might have otherwise have ended up at Disney World.” The analysts said Disney and Comcast will “increasingly be in competition for each theme park travel dollar.” To make matters more dicey for Disney, “there is a little bit of [political] friction and that’s probably not going away anytime in the near future,” Yoon said. According to the Bernstein analyst, this means that whatever Disney wants to do in Florida as it relates to theme park expansion, could face some challenges to get done. At the same time, Yoon said this is ultimately a mutually beneficial partnership where “Florida needs Disney’s income and Disney needs Florida,” which suggests the government in the state will likely have to bend in support of Disney if it wants more tax revenue for the state. Golden State expansion While Comcast and Disney parks also compete in California, the latter has a bigger foothold there, which is only going to get bigger. “In California, the government is easier to work with,” Yoon said, adding the Anaheim city council will likely continue to pass Disney’s development proposals since it would be financially beneficial for the city’s local economy. Yoon anticipates a meaningful portion, probably half of the $60 billion, is going to be spent on expansion rather than maintenance of Disney’s theme parks, with a big portion dedicated to California. According to Yoon, Disney is the “main attraction” in Anaheim, which is therefore reliant on revenue from the company’s parks. The setup in Anaheim is unlike Orlando, which has multiple theme parks that the Florida city and surrounding areas can rely on outside of Disney. The Orlando-area parks of Disney and Universal are roughly 10 miles apart. Disney’s Anaheim parks are roughly 40 miles from Universal Studios Hollywood. While smaller in California, Universal Studios Hollywood isn’t standing still. The park confirmed last month plans to build a high-speed outdoor roller coaster called Fast & Furious: Hollywood Drift. The ride is set to open in 2026. Where the Club stands While the power of Disney’s parks is welcome news for shareholders, Wall Street analysts and the Club are also focusing closely on streaming. We want management to continue to make strides toward streaming profitability and to make progress on cost-cutting and other items on Iger’s turnaround checklist. As discussed in last week’s May Monthly Meeting , Jim Cramer said he would consider buying more shares of Disney for the portfolio if the stock were to drop below $100. (Jim Cramer’s Charitable Trust is long DIS. 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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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