Disney: Iger needs to dream up better ideas than spending more on parks

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Disney theme parks are supposed to be magical places. Plans to increase spending on the division have given investors an unwelcome dose of reality instead. That explains the lukewarm reception the House of Mouse received after it announced its intention to spend $60bn expanding theme parks, cruise lines and resorts over the next decade. The figure is nearly twice what Disney has spent over the past 10 years.

Boss Bob Iger has good reason to double down on his main cash cow. The Disney Parks, Experiences and Products unit accounted for just a third of total group revenue last year but generated two-thirds of operating income. Its importance has grown amid problems elsewhere. The Disney+ streaming service continues to lose money while the broadcast and cable TV network businesses battle falling ad revenue and a shrinking subscriber base. 

Disney did not update spending plans for other businesses. Assuming spending elsewhere remains the same, annual capex could be around $7bn. The company reported operating cash flow of just $6bn last year, less than half its peak of $14.3bn in 2018. It also has a hefty amount of debt, about $44.5bn at the end of June.

Disney claims a sufficiently strong balance sheet and borrowing capacity to fund its new projects. Rumoured asset sales would lower the leverage ratio. Even so, investors are right to be concerned about its ability to generate free cash flow and restart dividend payments.

The theme park business has healthy operating margins. Historically, it has been able to generate ROICs in the low to mid teens. Analysts at Citi reckon if Disney can achieve a 15 per cent ROIC from the increase in investment, it could add as much as $2.40 in value per share annually. But Disney shares are trading at just two-fifths of their 2021 peaks. Parks are not enough. Iger still need to find fixes in Disney’s other divisions.