The Walt Disney Company: We Put Their Magic to the Test -- RBC Capital Markets

Key points:

Parks gut-check around Pandora opening

DIS hosted investors at Walt Disney World in Orlando under the auspices of this week's opening of Pandora (the world of Avatar). More broadly, the visit was a gut-check on the Parks & Resorts business with P&R representing around 25% of our FY17E/FY18E OI with y/y OI growth of 20%/15%, respectively. The operation continues to impress and we see it as both unique globally, and a source of DIS's earnings power.

Parks expansions to continue

Pandora is designed as an immersive experience anchored by two main ride attractions (which are awesome), with the curated world spread over 10+ acres. Along with Animal Kingdom, the attraction is intended to draw night-time traffic as well as day, which should help drive both attendance and more importantly per cap spend (a.k.a. yield) via longer visits. We expect major future capex such as Toy Story Land (expected open ~2018) and two Star Wars Lands (~2019) to have similar business characteristics: ~12-14 acre builds, 2-3 anchor attractions, immersive experiences, day and night attractions, dedicated retail/F&B.

Confidence at the top

CEO Bob Iger provided commentary around P&R, including that Shanghai just hit its target of reaching 10mm guests in its first year (around a month early). Investments continue at Shanghai, Hong Kong and Tokyo, while Paris is due for a facelift. On the domestic side the aforementioned expansions continue with margin expansion supporting management's strategy. As evidence, we think both P&R segment and domestic P&R incremental margins have been tracking >30% since FY14, and our estimates have this continuing. Parks & Resorts Chairman Bob Chapek also provided detail on the business, and some investors think he could be in the succession running as he's perhaps the only DIS senior exec to have run multiple segments (he formerly ran CP) and would have chops in both creative and operational disciplines.

Least Media = Best Media

DIS remains our top Outperform idea in Media and we remain confident in our nearly street-high estimates for both FY18E EPS ($7.00) and FY18E P&R OI ($4,554mm). We like DIS relative to peers because while we believe cord cutting is likely accelerating, DIS's sub loss sensitivity is well below the peer group given offsets outside of Media, including strong P&R ops, the Studio and the capacity for significant share buybacks.

Valuation:

We value Disney on a sum-of-the-parts basis, with target EBITDA multiples applied to each segment depending on our view of the growth outlook and quality of the assets. Our $130 price target implies an EV/EBITDA multiple of 11.4x on our blended CY2017E–18E (50%/50%) EBITDA of $19.5bn, or 19.3x P/E, and supports our Outperform rating.

Risks to rating and price target:

•             Consumers leaving the Pay-TV universe at significantly accelerated rates.

•             An economic recession that negatively impacts TV advertising spend and/or visits to Parks & Resorts assets.

•             A rapid negative change in ratings.

•             Underperformance of the Disney film slate.

•             Transformative acquisitions.

•             Changes to key leadership that are outside of the generally accepted succession.

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