Monday, December 20, 2010

Walt Disney (NYSE:DIS) at High End of Capital Spending Cycle

Needham said they see Disney's (NYSE:DIS) capex reaching the high end of the spending cycle, suggesting dropping marginal returns on incremental capital invested.

"This report tracks DIS’s capital allocation and efficiency trends for each of its major business segments through the Sept 30, 2010 quarter. Key take-ways include: 1) There is typically an 80-90% statistical correlation between forward-year ROICs and share prices in the media space. Recently it hit 83%; 2) Capital spending rose by $357M (20% y/y) in FY10 compared with EBITDA growth of $936M (11% y/y). In FY11E, we believe that DIS will step up its capital spending by $1-$1.2B to $3.2B compared with EBITDA growth of approximately $126M. This implies falling marginal returns on incremental capital invested; and 3) In the next two fiscal years, FY11 and FY12, DIS will be at the high end of a capital spending cycle as it launches two cruise ships and finishes its update of California Adventure. We expect capital requirements to abate beginning in FY 2013," said Needham.

Needham & Company maintains a "Hold" on Walt Disney, which was trading at $36.95, down $0.10, or 0.27 percent, as of 11:21 AM EST.

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