Disney's Pricey Magic Kingdom Delights Kids, Shareholders Alike

NEW YORK (TheStreet) -- Walt Disney's (DIS) theme parks look all set to boost shareholder returns.

The company has recently increased the ticket price of its iconic theme park. The parks and resorts segment is not nearly as profitable as some of Disney's other operations. With ongoing development and price increases, however, the unit could become a lot more attractive.

Disney shares have increased by 36% in the last six months to $83.34, easily outperforming Comcast (CMCSA), which is up 23% and the broader S&P 500 ETF (SPY), which is up 13% in the same period.

Despite the rally, Wall Street is still bullish on the stock. Its shares could continue to go higher. TheStreet has reiterated a buy rating on the stock, while RBC Capital has raised its price target to $89.

Walt Disney has increased the single day admission price to its Magic Kingdom theme park in Florida -- the most visited theme park in the world -- by more than 4% to $99. This is the second time in eight months that the company has increased the ticket price. Meanwhile, the price of other theme parks at Disney World, including Epcot, Animal Kingdom and Hollywood Studios, are also up by $4 to $94.

In the previous fiscal year ending September 2013, Disney's revenue from its parks and resort segment rose 9% to $14.1 billion while operating income climbed 17% to $2.2 billion.

The segment is the second-biggest contributor to Disney's revenues and earnings, behind media networks. The unit is responsible for more than 31% of the company's total revenues and more than 20% of its total operating income.

The segment, however, is not the most profitable. In the previous fiscal year, its operating margin was 15.8%, which is considerably lower than the 33.5% margin for media networks or the 31.3% margin for consumer products.

The news of the increase in prices at parks and resorts comes just after company reported another earnings beat in its quarterly results. For the first quarter of 2014, Disney's net income climbed 33.1% year-over-year to $1.84 billion, or $1.03 a share. Revenue increased 9% from last year to $12.31 billion. Adjusted earnings came in at $1.04 a share, better than the consensus estimate of 92 cents per share, according to data compiled by Thomson Reuters.

Disney reported an across-the-board increase in revenues in all segments, particularly ESPN and kids' movies. The sports network ESPN continues to drive the company's earnings growth. In the previous quarter, the media network segment, which includes ESPN, witnessed a 20% increase in operating income from last year to $1.5 billion The movie studios segment witnessed a 75% increase in operating income to $409 million, as it rode on the success of Frozen and Thor: The Dark World.

Meanwhile, Disney's operating income from its theme parks division climbed 16.3% from last year to $671 million. This was due to higher guest spending in the U.S. parks and resorts, and record levels of attendance at Walt Disney World, Hong Kong Disneyland and Tokyo Disney Resort. This offset the decrease in attendance at Disneyland Paris.

Revenue from parks and resorts rose 6.1% to $3.60 billion, from $3.40 billion in the same quarter last year. As per the recent quarterly results, the unit represents 30% of the company's revenues and 22% of its operating income.

Yet the theme parks division is not a highly profitable segment by Disney standards. Its margins have been under pressure due to costs associated with the rollout of MyMagic+, as well as an increase in labor costs.

Its profitability, however, has improved from last fiscal year. For the quarter, the unit reported an operating margin of 18.6%, which shows considerable improvement from its 15.8% margin in fiscal year 2013.

The parks and resorts segment has also taken the lion's share of Disney's capital expenditure. The company has increased its capital expenditure on the unit by 29% from the same quarter last year, to $539 million in the first quarter of the current fiscal year.

The increase was led by higher spending for construction work at Shanghai Disney Resort. Plus, Disney has spent more than a billion dollars on its NextGen initiative to make it easier for its guests to manage their vacations. In Florida, the company has been developing an Avatar-themed area in its Animal Kingdom theme park.

The company's investments have been criticized, but they are already making an impact and will likely drive significant growth over the next several years. This became apparent in the previous quarter when the company revealed that MyMagic+ has enabled Disney to serve an additional 3,000 customers daily.

Moreover, the ongoing expansion work could also drive significant traffic.

The Shanghai Disney Resort will not only translate into higher earnings, but it can also give a boost to the company's brand in China. This could result in better performance in consumer products, movies and television operations. It's a big opportunity.

Disney will, however, face tough competition. Its rival Comcast's Universal Studios will pump $500 million in capital expenditures into further develop its theme parks.

In terms of market cap, Comcast is slightly smaller than Disney -- the difference in their market cap is just $5 billion -- but its Universal Studios unit is significantly smaller than Disney's parks and resorts segment. According to their comparable quarterly results, the growth of Disney's theme parks segment has easily outpaced growth at Universal Studios.

Moreover, Disney will also have to deal with the rising threat from 21st Century Fox ( FOX), which is also looking to diversify its business into movie-inspired theme parks.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

If you liked this article you might like

Jim Cramer: Why You Can't Write Off FANG

Jim Cramer: Why You Can't Write Off FANG

Why I'm Watching AT&T, Time-Warner, Facebook and Oracle: Market Recon

Why I'm Watching AT&T, Time-Warner, Facebook and Oracle: Market Recon

Time to Sell Netflix and Buy Disney Stock Instead?

Time to Sell Netflix and Buy Disney Stock Instead?

NCAA 'March Madness' Highlights the Murky Business Of Paying College Athletes

NCAA 'March Madness' Highlights the Murky Business Of Paying College Athletes

Why Facebook's Stock Is Not Rallying Like the Rest of These Big Tech Names

Why Facebook's Stock Is Not Rallying Like the Rest of These Big Tech Names