Theme parks complicate valuation
After witnessing Disney’s (DIS) rise from $50 to $71 per share during 2013, many investors are attempting to determine whether the run can extend into 2014. To accomplish this, an investor must be able to get a sense of what the entire enterprise is worth. However, with Disney’s varied operating segments, this task has often proven difficult.
In particular, Disney’s theme parks, which possess a vastly different business model than the core media operations, complicate comparisons with media peers like Time Warner (TWX) or CBS (CBS). To understand Disney’s value, it’s useful to separate out the theme park division and determine its value independently, leaving the remaining media enterprise much easier to value. Disney, Time Warner, and CBS are members of the PowerShares Dynamic Media Portfolio ETF (PBS), which seeks to provide exposure to an index of media stocks.
The best way to establish a value for Disney’s theme park business is to understand how the market values other theme park operators like Six Flags (SIX) and Cedar Fair (FUN). The chart above depicts the companies’ historical enterprise value-to-EBITDA multiple (EV/EBITDA), which represents how much a potential acquirer would pay for the entire firm, regardless of capital structure.
In Part 2 of this series, we saw how Disney’s theme parks underperform peers’, with lower profitability and slower margin improvement. Given this result, it’s appropriate to apply a discounted valuation to the Disney division from that of its peers. Over the past three years, Cedar Fair and Six Flags averaged 8.7x and 12x EV/EBITDA, respectively. With the former being a far superior operator, a reasonable multiple for Disney’s theme parks should be around 7.5x. Given the segment’s EBITDA of $3.59 billion in the fiscal year ending September 30, 2013, the 7.5x multiple would value the theme park business at nearly $27 billion. This represents roughly 20% of Disney’s overall $137 billion enterprise value.
With an estimate of the Parks & Resort division’s value in hand, it’s now much simpler to evaluate the remaining business, which is essentially a pure media company. In the following segments, we’ll look at some of the value drivers for Disney’s media properties.