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Better Buy: Walt Disney vs. Nike

By Demitri Kalogeropoulos - Apr 2, 2021 at 7:22AM

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There are good reasons to like both stocks right now.

Between them, Nike (NKE 2.59%) and Walt Disney (DIS 3.50%) own dozens of the world's most recognizable consumer brands. And there's no question that each company dominates several attractive industry niches. Nike can look forward to years of outsize growth as the athleisure market expands. And Disney is making potentially game-changing moves in areas like subscription services and feature-film production.

Either blue-chip company will likely give you attractive long-term returns. But differences between the businesses might make one a better buy for certain types of investors today.

So, let's look at why you might prefer one of these stocks over the other right now.

A young woman jogging over a bridge.

Image source: Getty Images.

Why buy Nike?

The biggest reason to prefer Nike right now is that the business is already operating on solid footing. Yes, global sales growth dipped into negative territory in late 2020. But that decline was driven by temporary shipment challenges that will quickly reverse. Nike notched booming growth in its China market during the period, and management is forecasting better sales, and rising margins, through the rest of its fiscal 2021 (which ends May 31).

Disney's results, in contrast, are still being curtailed by the pandemic. Earnings and cash flow each fell by over 90% in the most recent quarter as consumers were kept away from theme parks, movie theaters, and cruise ships.

Along the same vein, there's a clear path toward improving results at Nike, whereas Disney's future is cloudy. Sales will be supported by an athleisure industry that's widely expected to grow steadily over the coming years. Nike has already demonstrated a knack for winning market share in that valuable niche. Its profitability will rise, too, as sales shift toward direct-to-consumer deliveries and as the footwear giant steps up the pace of new product introductions.

Disney is aiming for the same basic goals with its launch of Disney+ and its recent acquisition of the Fox film studio assets. Yet investors today have to rely on management's assurances, rather than on concrete numbers, to support that growth thesis. "We believe the strategic actions we've taken to transform our company will fuel our growth and enhance shareholder value," CEO Bob Chapek said in mid-February.

Why buy Disney?

Betting against Disney has rarely worked out for investors, and there are good reasons to believe the House of Mouse will trounce the market from here. Its subscription streaming service is off to a fantastic start, giving Disney a valuable platform it can use to launch and monetize all of its content. And Disney's in-person services, from cruise ships to theme parks, are likely due for an epic rebound if vaccines end the pandemic threat in the coming months.

Under normal circumstances, the entertainment industry is more lucrative than the apparel niche. Disney's fiscal 2018 is the best recent example, since 2019 was impacted by the Fox acquisition and 2020 was scrambled by COVID-19. That fiscal year (which ended Sept. 29), annual operating cash rose to $14.3 billion and earnings surged to $8.36 per share from $5.69.

NKE Cash from Operations (TTM) Chart

NKE cash from operations (TTM) data by YCharts. TTM = trailing 12 months.

The cash flow gap between the two companies has shrunk since then, but the pandemic's end should have Disney back to setting all-time records on this score relatively soon.

That prediction underscores the main difference between these two stocks today. If you prefer certainty and lower risk, then Nike seems like the better bet. Its quick sales rebound from the once-in-a-century pandemic helps illustrate its resilience.

Buying Disney today is more of a gamble (with favorable odds) that the entertainment business will enjoy its own rebound and will be stronger following the transformation it has been going through since 2019. There's plenty of support for that thesis, but investors won't know for several more quarters if it is actually playing out as Disney executives have predicted.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
$115.87 (2.59%) $2.93
The Walt Disney Company Stock Quote
The Walt Disney Company
$109.31 (3.50%) $3.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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