Dump the Parks to increase Stock Value!

[dshimel]

Hey, it's making a lot of money. Maybe it's valuable to someone else.
ESPN franchise is making all the money. With all the money from the sale, other companies, companies that are similar to the core of DIS business -- which is making movies and creating/managing vacation destinations based in part off those movies, can be bought.
(Starts with a P, ends in an R....)

The real value of Pixar is the people.... Many of whom would leave if Disney bought the company... It isn't like you'd buy Pixar to get access to their product catalog since Disney already gets half the profits and owns the characters and rights to produce sequals.


The parks are slow groth... Good for long-term value. Bad for short-term value. The question is, do the institutional investors that own 66% of the company want short-term stock price increase, or long-term slow growth?

[fkurucz]

Based on the FY04 Annual Report:
Parks and Resorts generates $7.75 billion in revenue, or 25% of the company's total revenue.

Subtract operating costs, and parks and resorts had $1.123 billion in operating income, or 25% of the company's operating income.

So far so good.....

The problem is that Parks and Resorts generated $805 million in depreciation. That is, money that was spent on capital improvement in prior years amd must be charged against profit this year. Operating Income - Depreciation (and taxes) is net profit realized by the stock holders.....

I wouldn't get too hung up on depreciation. It is an accounting gimmick. Is WDW worth $805M less? Not likely. Which is why depreciation is not used when creating cash flow statements.

[fkurucz]

I'd rather see the TV networks spun off. That makes more sense.

There is no way they will let go of ESPN. It too is a cash cow, and its revenue stream has steady growth.

[Wotan]

Disneyland is the anchor company though. It would be like coke selling off the cola division and only selling sprite

Ah, But Coca-Cola did spin off it's bottling divisions into CCE (Coca-Cola Enterprises), feeling there would be more profit growth that way.

In a similar fashion, I believe when Euro DL opened, it was done as a separately traded enterprise so it wouldn't affect either the parent's profits or bond ratings.

Let's face it--if Iger, et al, spins off the parks, we've seen the last $100m E-ticket development. Ever. Nobody has that kind of money to play with these days.

[fkurucz]

Actually, they generated negative cash flor for 2005.

Depreciation is NOT an accounting trick to reduce your taxes.... Depreciation is the REAL expense of using up your REAL assets that you're eventually going to have to refurb or replace again!

Depreciation is different from upkeep expenses. The basic idea is that an asset is "used up" and eventually sold at a "salvage" value. The truth however is that WDW has appreciated over the years, not depreciated. Its not like an old lathe that is worn out and sold as scrap.

[fkurucz]

Let's face it--if Iger, et al, spins off the parks, we've seen the last $100m E-ticket development. Ever. Nobody has that kind of money to play with these days.

It depends on who buys them. And as others have pointed out, the list of potential candidates is very short. Still, I would like to see OLC buy out the parks. My guess is that Disney will want more for the parks than what they are really worth, so its probably all moot anyway.

[cellarhound]

ZOoom.... Right over my head I guess....

$7.75 billion go into Parks and Resorts cash registers.... Then, $6.627 billion of that flys right out again in the form of employee costs, advertising costs, cost of good they sell, parts, paint......

This leave them with $1.123 billion... Write off depreciation, interest, other corp expenses.... you break even or losre money....

How would ANY of this change if they suddenly started thinking of DL as a content provider vs. content distributer.... Would that make more money come into the registers? Would that reduce the wages and healthcare costs of their employees.... Make advertising cheaper?

No, no, no...

You see, it is very difficult to measure profit potential... DL in some ways is under utilized, and it is seen now as "just a theme park." And the theme parks are an industry... So it is measured up with Six Flags, Cedar Fair, NBC/Universal, and other privately owned theme parks and entertainment companies.

Walt and ABC made DL super profitable by grouping DL not only as a theme park but as a form of media generation. TV shows produced at the park, involving the park....

Now, it is no longer that way. You don't see Epcot Magazine on TV... You don't see Disneyland USA there either... The Mickey Mouse Club is not filmmed there... DL is no longer a part of this "magic factory" that it once was.

Instead it becomes a marketing unit to desimulate media content. A place where you can by "Toy Story" toys. A place where you can see a movie... A place where you can see a broadway musical... A place where you promote a product line...

It is a question of creativity...

[dshimel]

Depreciation is different from upkeep expenses. The basic idea is that an asset is "used up" and eventually sold at a "salvage" value. The truth however is that WDW has appreciated over the years, not depreciated. Its not like an old lathe that is worn out and sold as scrap.

Partly correct.

Depreciation isn't just a measure of "used up" and sold for salvage. It is also a measure of "wears out" and "needs refurb".

Upkeep expenses that have to be done every couple years or less, like paint, is an operating expense. It is subtracted from this year's revenue to determine this year's operating income.

Upkeep expenses that are expected to last more than a couple years, like the Tiki Room refurb or Space Mt. refurb or repaving projects or Jungle Cruise refurb or Plaza Pavilion refurb or Columbia stripped to it's frame and re-skinned refurb and the Twain structural rebuild and.... are capitalized. The money doesn't count against this year's profit.... But you do have to charge them off as depreciation, since they will eventually need refurbed again.

They may never "scrap" the Mark Twain, but it will age and need refurbs. Depreciation is a reflection of this.


AND, while the $805 million depreciation doesn't count against cash flow, the $1 billion spent on capital this year does..... It counts against cash flow the year the money is spent, then counts against profit as it wears out and grows to need another refurb (depreciation).

Depreciation is a REAL expense. It is the accounting charge that shows the effect of previous years' capital improvement expenses.

[dshimel]

Ah, But Coca-Cola did spin off it's bottling divisions into CCE (Coca-Cola Enterprises), feeling there would be more profit growth that way.

In a similar fashion, I believe when Euro DL opened, it was done as a separately traded enterprise so it wouldn't affect either the parent's profits or bond ratings.

But SEC rule changes in the wake of Enron's ChewCo (and WorldCom and Adelphia and dozens of other companies) have made this illegal. DisCo has now rolled EDL's and HKDL's proft and loss into the parent company's consolidated report.

[fkurucz]

Partly correct.
They may never "scrap" the Mark Twain, but it will age and need refurbs. Depreciation is a reflection of this.

Agreed, but I seriously doubt that the depreciation rates used are a true reflection of these costs. I have always found the concept of depreciating real estate to be suspect.

Take space mountain in DL. The track did wear out and had no value other than as scrap. In that case the depreciation of the track and its associated components made sense. Of course, DL also depreciated the building, which is worth far more now than when it was built 20 odd years ago, and does not require any major rehabs beyond paint and fixing roof leaks. AFAIK, there have been no major capital expenses made on the building.

I suppose it depends on where one draws the line between operating and capital expenses. I remember at one place where I worked: if your PC was a desktop system it was expensed, if it was a "tower" (and sat on the floor) it was capital and therefore depreciated. Why? Beats me. There was no significant difference in lifespans between the two.

[sediment]

I remember at one place where I worked: if your PC was a desktop system it was expensed, if it was a "tower" (and sat on the floor) it was capital and therefore depreciated. Why? Beats me. There was no significant difference in lifespans between the two.

Laptops are more likely to be broken, since they're mobile. Stolen as well. It makes more sense to expense them. And since you have to depreciate en masse (i.e., not depreciate each PC as you believe it has individually lost value or has used up its life), it makes sense to use a schedule that best represents the cost allocation on average.

Yes, depreciation can be used for evil instead of good. But buying or creating an asset and expensing it the buy/build year makes even less sense. That's one year of loss followed by 10 years of profit (assuming lots of things).
And some do use it to lower taxes in one year, but if the depreciation schedule is wrong, then there will be more tax to pay later. This is preferred, since it is likely to be someone else's problem by then (individual short-term thinking).

[sediment]

Take space mountain in DL. The track did wear out and had no value other than as scrap. In that case the depreciation of the track and its associated components made sense. Of course, DL also depreciated the building, which is worth far more now than when it was built 20 odd years ago, and does not require any major rehabs beyond paint and fixing roof leaks. AFAIK, there have been no major capital expenses made on the building.

1. the depreciation schedule for the track probably did not end just as it was replaced. So, that means profits were transferred from one year to another. Overall, for the 25 or so years it was in operation, the depreciation worked.
2. The "depreciation" of buildings is more like amortizing the cost over several years than actual depreciation. A rose...
3. Space Mountain might not be forever. I don't think the building is all that valuable. A new attraction could be built in its place, scrapping the whole building. (Of course, if someone wanted to buy the shell on eBay, yeah, that "profit from sale" would be taxed.)

[dshimel]

I suppose it depends on where one draws the line between operating and capital expenses. I remember at one place where I worked: if your PC was a desktop system it was expensed, if it was a "tower" (and sat on the floor) it was capital and therefore depreciated. Why? Beats me. There was no significant difference in lifespans between the two.

Companies have some wiggle room in how they declare their expenses.

They can make a computer an operating expense, in which case it hurts this year's profits. OR, they can capitalize it and write it off over 5 years, in which case it doesn't hurt this year's profit, but does hurt the next 5 years' profits.

What they DON'T have wiggle room on is doing one or the other..... You must charge it this year, or you must charge it off over time.

Land itself does not depreciate, but the buildings do. No, they didn't tear down and rebuild Space Mountain's building, but

Let's say they spent $20 million to build the building. Then every 5 years they have to spend $2 million to reroof, repaint, retile, repair, refresh..... After 50 years, they'll have spent $40 million, $20 million construction and $20 million capital improvements... Is the building worth $20 million or $40 million? The answer is, since they could rebuild it for $20 million, the building is worth $20 million... The other $20 million will have depreciated away.

Again, a company can decide what they want to count as operating vs. what is capital (within certain guidelines), but what they can't choose to do is neither of these. If it operating, it is charged against this year's profit. If it is capital, it MUST be charged against future year's profits. This year's depreciation is the total off all the previous years' capital investments that they put off.....

[Giant Panda]

Although I find all this interesting, it is a tad over my head, and I wonder if I'm the only one reminded of the "Miracle of Birth" scene of The Meaning of Life when Michael Palin's character of the hospital administrator expresses delight in the use of the "machine that goes "PING" :

Aah! I see you have the machine that goes 'ping'.

This is my favourite.

You see, we lease this back from the company we sold it to, and that way, it comes under the monthly current budget and not the capital account.

[dshimel]

I wonder if I'm the only one reminded of the "Miracle of Birth" scene of The Meaning of Life when Michael Palin's character of the hospital administrator expresses delight in the use of the "machine that goes "PING" :

That is not even funny.

Back in the late 90s, Adelphia Communications and ..umm... forgot their name... something like Intercontenantel Comm.... or something like that were cross leasing their lines to each other.

It worked like this.....

I buy $1 million in bandwidth from you. You count it as income. I capitalize it, so it doesn't count as a cost. You buy $1 million in bandwidth from me. I count it as income. You capitalize it...

Result, we each made an extra $1 million this year that we get to report as revenue growth to get our stock price up..... but we'll have to charge it off as a depreciated cost at 20% a year for the next 5 years dragging down future profits..... but most people think depreciation is just a way to cut your taxes... and all the idiot investors are looking at is revenue anyway.