Disney’s (DIS) five separate operating segments can present a challenge for investors attempting to estimate a valuation of the enterprise or forecast its operating performance. The division that most separates Disney from media peers is certainly the company’s cherished Parks & Resorts segment, which includes the Disney theme parks, hotels, and cruise lines. Disney is a member of the PowerShares Dynamic Media Portfolio ETF (PBS), which seeks to provide exposure to an index of media stocks.
Disney’s theme parks generate attention primarily from their connection to the company’s media productions. However, the segment’s operating and financial profiles differ substantially from the company’s core media business. Different levels of profitability, margins, risk, and growth rates call for a different approach to analysis and valuation.
The best way to evaluate the theme parks division is to compare performance and results with direct peers like Six Flags (SIX) and Cedar Fair (FUN), the two largest domestic adventure and theme park operators. The chart above compares the profit margins of the three peers over time using earnings before interest, taxes, depreciation, and amortization, or EBITDA. This measure is useful because it strips out the items that result from different taxations, capital structures, or asset depreciations in order to make results more comparable across separate companies.
We should draw two interesting conclusions from the chart. First, Cedar Fair appears to be the best-in-class operator with the highest profitability and has consistently delivered margins around 35%. Disney, on the other hand, has greatly underperformed peers, generating EBITDA margins nearly a full 10 percentage points beneath those of Cedar Fair. While Disney has certainly expanded margins in recent years, even the improvement has lagged peers: Disney’s EBITDA margin grew 12% from its lowest point in 2010, while Cedar Fair and Six Flags grew 16.5% and 51%, respectively, from their lowest years.
Disney’s lackluster performance in running its theme parks calls for a discounted valuation relative to peers. In the next segment, we will address valuation metrics and compare across peers in order to determine what Disney’s theme parks division may be worth.