Better Buy: Disney vs. Nike

Both Walt Disney (NYSE: DIS) and Nike (NYSE: NKE) can credit their success over the years to brand power. Disney's movies and theme parks attract millions of fans every year, while Nike's swoosh is recognized the world over. Both brands have consistently delivered the goods for shareholders over the years, but which stock should you buy today? Let's find out.

Performance and valuation

Both companies have something to offer investors looking for growth.

Over the last decade, Disney stock has delivered a return of 514%, including dividends. This return can be explained mostly by an increase in earnings per share of 424%, while revenue increased only 67%. Keep in mind that Disney experienced a jump in profits in 2018 due to a lower tax rate from tax reform.

On the other side, Nike has grown the top line faster, thanks to the tailwind of rising demand in the athletic apparel market, particularly in China. The swoosh brand saw revenue more than double over the last decade, with earnings climbing 237%.

But Nike's earnings growth doesn't fully explain the 570% total return in the stock over the last 10 years. Roughly half of Nike's return is due to a higher P/E ratio that investors are willing to pay for the company's earnings today compared to 10 years ago, whereas investors are still assigning Disney stock about the same valuation on a trailing P/E basis.

Nike stock currently has a forward P/E of 27.4 based on this year's earnings estimates, which is higher than Disney's forward P/E of 20.6. That's a considerable gap in valuation between the two.

Let's now look at growth expectations to see whether Nike's higher valuation is worth it over Disney.

What the future holds

Wall Street analysts currently expect Nike to grow earnings 14% per year, while analysts expect Disney earnings to be roughly flat over the next five years. Based on that, we could wrap this up and declare Nike the better buy, but it's not that simple.

Digital is Disney's future, and the company is investing aggressively to push its advantage. ESPN+ launched last year, and is performing well with 2 million subscribers so far. Also, Disney has big plans for Hulu, in which it now has a controlling interest after the recent deal with Fox (formerly known as Twenty-First Century Fox).

This fall the company is launching Disney+, which will be the exclusive streaming video service for everything that is most valuable to the company -- classic Disney films, Star Wars, Marvel, Pixar, and other content like National Geographic that it picked up as a result of the Fox deal. It is also investing in original content for the service.

Transitioning an entire entertainment empire to digital will require substantial investment, and that's why earnings growth may be lacking over the next few years. Even though management expects Disney+ to grow rapidly, it's not expected to contribute a profit until fiscal 2024 (which ends in September).

However, this doesn't mean Disney stock can't move higher. As we've seen with other digital streaming stocks, notably Netflix, investors are willing to give streaming companies credit for revenue growth if there is a positive contribution margin (a term streaming companies use for gross margin) from content spending.

Investors will likely give Disney the same benefit of the doubt, and there's already evidence of this. The stock jumped 11% immediately following the announcement of Disney+ in April even though the company made it clear that the digital streaming services are not going to be profitable for a while. Following that announcement, two analysts lifted their price targets on the stock to around $170 based on the strong growth they expect from Disney+.

What about Nike?

Nike has good growth prospects as well. The sneaker market is gaining momentum, and investments in innovation over the last few years have allowed the brand to regain its footing in the ongoing battle with competitors.

Additionally, Nike sees a significant opportunity to grow apparel sales, which make up only 30% of total revenue. It is also having a lot of success with its digital initiatives, including the SNKRS app, which is popular with millennial sneakerheads and is driving brand heat.

Which is the better buy?

All in all, this decision comes down to valuation. Disney's lower valuation, coupled with the prospect that it may have the fastest-growing streaming service when Disney+ launches, makes the House of Mouse the better buy, in my view.

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John Ballard owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix, Nike, and Walt Disney. The Motley Fool has a disclosure policy.