Disney (DIS 0.17%) and Nike (NKE 0.03%) are both classic American brands and members of the Dow and S&P 500 indexes. Disney owns theme parks worldwide, a wide range of media networks like ABC and ESPN, and iconic properties from Pixar, Marvel, and Lucasfilm. Nike is one of the world's top producers of athletic footwear and apparel.
But the past year has also been challenging for both companies. Disney struggled as the pandemic shut down its theme parks, closed theaters, and disrupted the production of its new movies and shows. Nike's sales tumbled as the pandemic disrupted its supply chains and retailers.
Disney and Nike will both likely survive these near-term challenges, but which stock is the better buy right now?
Disney tries to roll with the punches
Disney's revenue dipped 6% to $65.4 billion in fiscal 2020, which ended on Oct. 3.
Rising revenue at its Media Networks and DTCI (direct-to-consumer and international) unit, which includes Disney+ and its other streaming platforms, partly offset the declines at its Studio Entertainment and Parks, Experiences, and Products businesses.
However, the loss of its higher-margin theme park revenue, along with the widening losses at its streaming business, are crushing Disney's margins. As a result, its adjusted EPS plummeted 65%.
To protect its bottom line, Disney suspended its dividend, announced a new $11 billion debt offering, cut jobs, and brought back former CEO Bob Iger as an executive chairman to help CEO Bob Chapek navigate the crisis. It also unified all its media segments into its new "Media and Entertainment Distribution" group to prioritize the expansion of its streaming ecosystem, which reaches over 120 million paid subscribers.
But Disney still faces brutal headwinds. Disneyland in California remains closed, Disneyland Paris was recently closed again, and its other parks could still close amid a second wave of COVID-19 infections.
Disney's cable networks will also likely keep losing subscribers to cord cutters, forcing it to aggressively expand its unprofitable streaming platforms. If movie theaters close down again, it could release more of its upcoming films on Disney+ -- which would sacrifice its box office revenue to gain new streaming subscribers.
Disney expects those headwinds to continue throughout fiscal 2021, and for tough comparisons to Star Wars: The Rise of Skywalker and Frozen 2 in 2020 to dent its theatrical and consumer products revenue.
Despite all those challenges, analysts expect Disney's revenue and earnings to rise 6% and 4%, respectively, as its declines bottom out. Next year, they expect its revenue to rise 19% as its earnings more than double -- but investors should take those long-term forecasts with a grain of salt.
Nike faces an easier road back
Nike's revenue fell 4% (2% in constant currency terms) to $37.4 billion in fiscal 2020, which ended on May 31, as the pandemic disrupted its sales in the fourth quarter.
Nike's digital sales surged as brick-and-mortar stores closed down, but that growth (79% in constant currency terms in the fourth quarter) couldn't offset its loss of in-store revenue. Higher fulfillment costs, higher tariffs, and discounts throughout the crisis all weighed down its margins, and its EPS tumbled 36%.
But in the first quarter of 2021, Nike's revenue dipped just 1% year-over-year (and stayed flat in constant currency terms) as most of its stores reopened. Its direct-to-consumer "Nike Direct" sales rose 12%, buoyed by an 82% jump in Nike's digital revenue, as lower operating expenses boosted its EPS 10%.
CFO Matthew Friend expects Nike's revenue to rise by the "high single-digits to low double-digits" for the full year. Friend sees "stronger than anticipated demand" for its brands to remain "constrained in the near-term" by the pandemic, but he also believes Nike's growth will accelerate in the second half as it resolves that bottleneck.
Wall Street expects Nike's revenue and earnings to rise 12% and 79%, respectively, this year. Next year, analysts expect its revenue to rise 11%, with 28% earnings growth -- assuming a second wave of infections doesn't disrupt its supply chain and brick-and-mortar stores again.
Nike notably didn't suspend its dividend, which currently yields 0.8%, during the crisis. However, it still issued a new $6 billion debt offering in late March, and cut hundreds of jobs to shore up its cash flows.
The better pick: Nike
Nike's stock trades at 50 times forward earnings, while Disney has a higher forward P/E ratio of 54. Neither stock is cheap relative to its profit growth, but Nike arguably deserves a higher valuation than Disney.
Nike struggled throughout the pandemic, but its business is simpler and it's been recovering. Disney faces a much tougher uphill battle -- it needs to reopen its theme parks, resume the theatrical releases of its movies, and mitigate its loss of cable subscribers by expanding its unprofitable streaming ecosystem.
Nike expects its growth to accelerate later this year, but Disney doesn't seem as optimistic. Since both stocks trade at comparable valuations, Nike is clearly a better buy than Disney at current prices.