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Better Buy: Disney vs. Nike

By Rick Munarriz - Oct 25, 2019 at 10:55AM

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These two brands have been hitting all-time highs this year, and the future is bright for both iconic names despite the rich valuations relative to their slow growth.

You won't find too many iconic brands that have stood the test of time like Disney (DIS -0.90%) and Nike (NKE -3.41%). They command attention and pricing power, largely on name recognition alone. A well-entrenched fan base and a reputation for quality can work wonders for a company -- as well as for its investors.

Nike stock hit another all-time high this week. Disney has corrected by a little more than 10% since its summertime peak. They are both still market beaters in 2019, a far cry from how the situation was playing out the last time I pitted the two stocks against one another more than two years ago. Investors were concerned Disney was going to be a cord-cutting casualty, with ESPN and Disney Channel subscriptions fading. Nike was also trading near a 52-week low as athletic footwear retailers were reeling. Let's see why both killer brands are winning again and ultimately decide which is the better buy right now.

Alice in Wonderland costumed characters appearing puzzled in front of the Mad Tea Party ride at Disney World.

Image source: Disney.

Swoosh mountain

They say that athletic footwear and apparel trends can be fickle, but Nike has been resilient. It has only posted one year of declining revenue over the past 20 years, and that was a modest 0.8% dip in fiscal 2010, when the global recession was bottoming out. Revenue rose 7% in last month's first-quarter report for fiscal 2020.

Disney hasn't been as consistent, but it's no slouch, with just two fiscal years of top-line declines in the last 18 years. The media entertainment business is going to have its ups and downs, especially when a lot is riding on its ability to crank out box-office blockbusters and smash-hit TV shows.

Neither company will tantalize you with scintillating growth. You have to go back to fiscal 2004 to find the last time Disney posted double-digit growth. It will happen this year, but only because of the inflated results following its acquisition of most of Fox's content assets, which closed earlier this year. Nike has broken into double digits just twice over the past decade, and barely so, with a 16% advance in fiscal 2012 and a 10% top-line uptick three years later.

Slow yet steady is par for the course at both companies, and there's nothing wrong with that for risk-averse investors. Even the dividends are sleepy at both companies, with Nike and Disney yielding 1% and 1.3%, respectively. These aren't the kinds of payouts that woo dividend investors.

There is some risk in these investments. Neither one is cheap based on their slow growth rates. Disney is trading at 23 times this new fiscal year's projected earnings, with Nike's multiple clocking in at a stiff 31 for its new fiscal year. There are also leadership transition questions at both companies. John Donahoe, a seasoned tech executive, will be taking over as president and CEO at Nike come January. Disney helmsman Bob Iger has extended his stay until 2021, but no one has been publicly named as being groomed to be his successor.

However, these are still exciting times for both companies. Disney is about to disrupt itself with the launch of Disney+, and it continues to put out the biggest box-office winners and run the world's most-visited theme parks. Nike continues to raise the bar as an innovator. Both stocks have the skill set and catalysts to continue beating the market in 2020 the way they have this year, but Disney gets the nod as the better buy here. It has the better moat -- though Nike is no slouch on that front -- and it's also more attractively priced after the recent pullback.

Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Nike and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$108.13 (-0.90%) $0.98
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$110.11 (-3.41%) $-3.89

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