The Walt Disney Company (NYSE:DIS) shares are down more than -2.95% this year and recently decreased -0.67% or -$0.7 to settle at $104.34. Under Armour, Inc. (NYSE:UAA), on the other hand, is up 41.23% year to date as of 05/17/2018. It currently trades at $20.38 and has returned 9.81% during the past week.
The Walt Disney Company (NYSE:DIS) and Under Armour, Inc. (NYSE:UAA) are the two most active stocks in the Entertainment – Diversified industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect DIS to grow earnings at a 12.08% annual rate over the next 5 years. Comparatively, UAA is expected to grow at a 31.01% annual rate. All else equal, UAA’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. The Walt Disney Company (DIS) has an EBITDA margin of 28.82%. This suggests that DIS underlying business is more profitable DIS’s ROI is 14.20% while UAA has a ROI of 1.00%. The interpretation is that DIS’s business generates a higher return on investment than UAA’s.Cash Flow
Cash is king when it comes to investing. DIS’s free cash flow (“FCF”) per share for the trailing twelve months was +2.29. Comparatively, UAA’s free cash flow per share was -0.08. On a percent-of-sales basis, DIS’s free cash flow was 6.19% while UAA converted -0.71% of its revenues into cash flow. This means that, for a given level of sales, DIS is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. DIS has a current ratio of 0.90 compared to 2.00 for UAA. This means that UAA can more easily cover its most immediate liabilities over the next twelve months. DIS’s debt-to-equity ratio is 0.55 versus a D/E of 0.46 for UAA. DIS is therefore the more solvent of the two companies, and has lower financial risk.Valuation
DIS trades at a forward P/E of 13.86, a P/B of 3.47, and a P/S of 2.70, compared to a forward P/E of 65.95, a P/B of 4.48, and a P/S of 1.66 for UAA. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. DIS is currently priced at a -12.98% to its one-year price target of 119.90. Comparatively, UAA is 42.72% relative to its price target of 14.28. This suggests that DIS is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. DIS has a beta of 1.28 and UAA’s beta is -0.26. UAA’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. DIS has a short ratio of 3.88 compared to a short interest of 10.38 for UAA. This implies that the market is currently less bearish on the outlook for DIS.Summary
The Walt Disney Company (NYSE:DIS) beats Under Armour, Inc. (NYSE:UAA) on a total of 9 of the 14 factors compared between the two stocks. DIS is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, DIS is the cheaper of the two stocks on an earnings and book value, DIS is more undervalued relative to its price target. Finally, DIS has better sentiment signals based on short interest.