The Walt Disney Company (NYSE:DIS) investors cheered last week’s announced buyback, where the family entertainment giant will buy back as much as $8 billion in stock starting next year.
“We just worked our way through a huge capital cycle,” CFO Jay Rasulo told attendees at an investing conference, arguing that The Walt Disney Company (NYSE:DIS) will now experience a surge in free cash flow.
There is also some healthy visibility on future inflows. Striking a lucrative streaming deal with Netflix, Inc. (NASDAQ:NFLX) will provide a steady flow of capital from the leading video service, and that in turn helps lower its risk exposure to new theatrical properties. After spending billions on Pixar, Marvel, and Lucasfilm, it should be getting a healthy return on its next few years of movie releases.
However, what if this isn’t enough to give The Walt Disney Company (NYSE:DIS) the wiggle room to earmark another $6 billion to $8 billion in buybacks?
I’m not the first to voice my concerns here. Fellow Fool Chad Henage was all over this last week. He was concerned that The Walt Disney Company (NYSE:DIS) was gearing up to borrow to buy back shares at a time when competition is heating up and when the repurchase may not substantially move the needle in terms of increasing profitability on a per-share basis.
Let me key in on the theme park challenge, specifically in Florida.
The Walt Disney Company (NYSE:DIS) may think that capital cycle is largely over in Florida, but try telling that to the competition. SeaWorld Entertainment went public earlier this year, making it easier to tap the public markets to raise money to expand its SeaWorld Orlando and Busch Gardens Tampa that compete with Disney for tourists. Early anecdotes indicate that SeaWorld is actually scaling back instead of charging forward to produce acceptable quarterly results, but that can change in a hurry.
The bigger challenge, though, will be Universal Orlando. Comcast Corporation (NASDAQ:CMCSA)‘s Steve Burke also spoke at the conference, and the parent company of the Universal Orlando resort in Florida seems ready to invest heavily in taking on the House of Mouse.
Burke feels that his Universal Orlando resort can hold as many as 15,000 hotel rooms, considerably higher than the 2,400 rooms that it currently has across three on-site hotels. There’s already a fourth resort going up that will increase the resort’s capacity to 4,200 rooms. As Disney knows, encouraging guests to stay at a resort makes them more captive than the tens of thousands of rooms available nearby.
For Burke, this could also be personal. He was a key part of Comcast Corporation (NASDAQ:CMCSA)’s failed buyout bid for The Walt Disney Company (NYSE:DIS) nine years ago. Burke was a longtime Disney exec, and his father was the head of Capital Cities/ABC until just before Disney acquired the ESPN parent in 1996.
However, it’s undeniable that Universal Orlando’s Universal Studios Florida and Islands of Adventure have been gaining momentum since opening a Harry Potter-themed area that will expand next year.
Disney may think that the days of investing heavily in its theme parks may be over, but now is not the time to be complacent.
The article Disney May Be Making a Big Mistake originally appeared on Fool.com and is written by Rick Munarriz.
Longtime Fool contributor Rick Munarriz owns shares of Walt Disney and Netflix. The Motley Fool recommends and owns shares of Netflix and Walt Disney.
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