One company markets shoes and the other one sells entertainment experiences, but at their cores, Walt Disney (DIS 0.81%) and Nike (NKE 1.66%) are in the same business. Both companies, through their global brands and massive intellectual property portfolios, built consumer-focused empires that have endured for decades.
Yet the blue chip giants each underperformed the market in 2017 as they turned in unusually weak operating results. Below, we'll look at which might make the better stock for investors today.
Here are a few key financial metrics to set the stage:
|
Metric |
Walt Disney |
Nike |
|---|---|---|
|
Market cap |
$169 billion |
$104 billion |
|
Revenue |
$55 billion |
$34 billion |
|
Sales growth |
(1%) |
6% |
|
Profit margin |
16.3% |
12.3% |
|
Price-to-earnings ratio |
20 |
28 |
|
Dividend yield |
1.5% |
1.2% |
|
52-week price performance |
3% |
26% |
Data sources: Yahoo! Finance and company financial filings. Revenue and sales growth are over the last complete fiscal year.
Rock-solid businesses
You won't go wrong with either investment when it comes to financial strength. Disney and Nike each operate diverse business lines that consistently demonstrate their value to the companies. For Disney, it was booming growth in the parks and resorts segment that offset weakness in the broadcast and cable media division in 2017. Nike, meanwhile, leaned on its international markets to deliver sales growth even as the wider U.S. industry contracted.
Image source: Getty Images.
The spoils from these businesses are many. Disney turned a whopping 16%, or $8.7 billion, of its revenue base into free cash flow last year to mark a 4% improvement over the prior year's results. Nike's return on equity, at the same time, improved to 34% from 30% in the prior year, and 23% in 2013. Both companies are highly profitable and pay a dividend yield of just over 1%, or slightly lower than the market average.
Dealing with challenges
The bigger differences start to show up with respect to the rapidly changing market conditions that threaten their growth outlooks. Major elements of their core businesses are being challenged today, in Disney's case by a consumer shift toward internet TV, and in Nike's case by the e-commerce revolution.
You can't fault Disney for having a timid response. CEO Bob Iger and his team are planning to launch two major streaming subscription services in the next few years that aim to replace the revenue Disney has lost as subscribers flee the cable TV ecosystem. Its $52 billion merger with Twenty-First Century Fox also promises to keep Disney at the top of the box office rankings for the foreseeable future.
Nike, on the other hand, believes two key factors will keep sales and profits chugging higher even as the U.S. retailing market struggles with weak customer traffic. These are international growth, especially in China, and direct-to-consumer sales through its own e-commerce initiatives.
Buy Nike for stability
Both companies have tremendous assets, including world-class brands and prime market positions, that make it likely they'll succeed over the long term. But risk-averse investors might prefer a Nike investment today.
That's because shareholders will know relatively quickly how well its rebound strategy is working simply by following sales and profitability figures over the next few quarters. The company is calling for high-single-digit revenue gains and a rebound in gross profit margin starting in 2018. Hitting those goals will mean the past year of sluggish growth was more of a temporary speed bump.
Betting on a Disney turnaround will require more patience, as it might take years before we learn that its pivot to streaming video is paying off. The same goes for the Twenty-First Century Fox merger. Investors won't be sure for some time whether that acquisition joins the list of Disney's successful purchases like Marvel and Pixar. In my view, that uncertain future makes it a riskier bet today.
