Investing in the best stocks involves choosing ones with the best long-term prospects. While this sounds simple, executing this plan can prove challenging. After all, no one has a functional crystal ball.
But conducting research can increase your odds of success. Let's dive into Walt Disney (DIS +0.14%) and Target (TGT +0.00%) -- two successful companies that have both had recent challenges -- to see which one looks like the better stock to add to your portfolio right now.
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The situation at Disney
Media giant Disney operates a sprawling empire encompassing television networks, streaming services, movie studios, theme parks, and a cruise line. It also sells merchandise. But all hasn't been right with Disney's business, and over the past year, its stock price has fallen by more than 28% while the S&P 500 index rose by more than 3%.
Earlier this year, under pressure from activist investor Nelson Peltz and his hedge fund, Trian Fund Management, CEO Bob Iger agreed to a series of steps to improve profitability. These included cutting expenses by $5.5 billion, an increasing focus on streaming profitability over growth, and reinstating dividends by the end of 2023.
NYSE: DIS
Key Data Points
Disney's recent quarterly results show that management has some work to do. In its fiscal third quarter, which ended on July 1, revenue increased by 4% to $22.3 billion. But diluted earnings (excluding certain items like restructuring charges) fell by 5.5% to $1.03 per share.
Revenue from the direct-to-consumer streaming business rose by 9% to $5.5 billion, and its loss narrowed from $1.1 billion in the prior-year period to $512 million. Average revenue per subscriber at Disney+ grew by 2% to $6.58.
Still, management will increase prices for its streaming services for the second time in less than a year. While other streamers have made similar moves in their attempts to achieve profitability, raising prices and placing more ads in their shows and movies risks alienating subscribers, like cable companies once did.
The situation at Target
Mammoth retailer Target has stumbled recently. For more than a year, the company has worked to reduce inventory as shoppers focused more on necessities and less on discretionary items.
And management has made progress. As of July 29, the end of its fiscal second quarter, its inventory was $12.7 billion -- down by more than 17% from where it stood a year ago. Target's gross margin also recovered to 27% from 21.5% in the prior-year period, in part due to a reduction in markdowns.
NYSE: TGT
Key Data Points
Nonetheless, as consumers continue to focus more on necessities, Target faces challenges. Same-store sales (comps) fell by 5.4%, and management expects another mid-single-digit percentage drop in the second half of the year. The company faces stiff competition in the staples category, as rivals such as Walmart and Amazon offer basic merchandise at rock-bottom prices.
The consumer has been stressed by rising prices, and while inflation has dropped sharply over the past year (the Consumer Price Index was back down to 3.2% in July) the possibility of a recession remains as the Federal Reserve remains committed to fighting inflation. Hence, it may take some time for demand to pick back up for Target's more differentiated merchandise categories.
Fortunately, shareholders can rely on its dividend payments while waiting for sales to improve. In June, the board of directors boosted the quarterly dividend from $1.08 per share to $1.10 per share, bringing its streak of consecutive payout hikes to 52 years. At the current share price, Target's dividend yields 3.4%, more than double the S&P 500's current yield of 1.6%.
Weighing valuations
Disney shares now trade at a price-to-sales ratio of 1.8 compared to nearly 3 a year ago. But it confronts risks that its efforts to boost profitability, particularly for its streaming business, will fall short.
Target's stock has dropped by more than 21% over the last year, and trades at a price-to-sales ratio of under 0.6, down from over 0.7. But the retailer's issues appear cyclical, and shareholders can keep collecting dividends while waiting for the economy to shift. That makes Target the winner in this battle between the two consumer giants.
