Analysts: Cars Land to Boost Disney Theme Parks Unit

Cars Land Opening Night - H 2012
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Cars Land Opening Night - H 2012

Financial growth in the division “continues to be a positive for investor sentiment," says Miller Tabak analyst David Joyce.

Wall Street is paying close attention as the Walt Disney Co. on Friday opens the gates to the new Cars Land in Disneyland's California Adventure theme park in Anaheim -- one of the entertainment giant's biggest theme parks investments ever.

The new attraction is part of a $1.1 billion overhaul designed to boost the performance of California Adventure.

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Analysts will keep an eye on how it works out financially, especially given that theme parks head Tom Staggs is a leading candidate to succeed Disney CEO Bob Iger. Several of them late in the week projected a positive effect of Cars Land on the theme parks unit.

Miller Tabak analyst David Joyce said in a report Friday that Cars Land and other new attractions "should continue to drive at least 4 percent attendance and per-capita spending growth at Disneyland in the fiscal third and fourth quarters, which may prove to be conservative." In the most recent quarter, attendance rose 7 percent as per-cap spending rose 5 percent.

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The theme parks outlook played into the analyst's decision to raise his short-term price target on Disney from $48 to $53 and his long-term target to $56. "We are increasing our Walt Disney price targets specifically for better cable network and studio entertainment margin expectations, but we also believe a potential 17 percent increase in parks and resorts segment operating income, just under our prior estimate, continues to be a positive for investor sentiment," Joyce said.

Following a management presentation and Cars Land tour for analysts on Thursday, Davenport & Co. analyst Michael Morris also shared his thoughts on the new attraction, saying that the company's executives are "targeting a midteens return on invested capital on these projects and believe margins for the total [theme park] segment can return to the 20 percent level seen in prior peak periods."

Morris said the investment makes sense to keep consumers engaged. "The focus continues to be on parks quality and overall experience, [which helps ensure] consumers feeling that they are getting value for the dollar spent," he wrote.

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Morgan Stanley analyst Benjamin Swinburne said the new attractions also help Disney with theme park price increases it has instituted. "Strong parks pricing is a function of both recent investments and solid demand," he said in a report. He quoted Staggs as telling analysts that "we are in the guest-experience business" at Disney.

The conglomerate's theme park price increases averaged roughly 6 percent-7 percent for its Florida theme parks and 11 percent-15 percent for its California parks. All this suggests "that our recently raised parks forecast (following beats in both attendance and per-caps last quarter) is likely conservative," Swinburne said. "The price increase immediately precedes the unveiling of Cars Land at the California Adventure park and follows initial phases of the Fantasyland expansion at Disney World [in Orlando], as Disney begins to monetize a multiyear reinvestment in its theme parks."