Better Buy: Walt Disney Co vs. Nike Inc

By Brian Stoffel Markets Fool.com

Peter Lynch was a master investor, and one of his most famous axioms was to "buy what you know." The two companies squaring off in today's competition -- Walt Disney (NYSE: DIS) and Nike (NYSE: NKE) -- are two of the most perfect candidates for following in Lynch's footsteps.

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But which is a better buy, the media conglomerate that owns some of the most valuable characters the world has ever seen, or the apparel company that started out in shoes and has spread its tentacles to all thing sports?

Image source: Getty Images.

That's not a question we can answer with 100% certainty. But there are different lenses through which to view the question. Below are three of the most important ones -- and how the two companies stack up.

Sustainable competitive advantages

Let me sum up the importance of sustainable competitive advantages -- often referred to as "moats" -- like this: You should spend 80% of your research time investigating it. In its simplest sense, a moat is that special something that differentiates a company from all of its competitors. It is what keeps customers coming back again and again, and keeps competitors at arm's length for what seems like an eternity.

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Nike's primary moat is its brand. The swoosh is one of the most recognizable sports symbols in the world. That's important because it isn't that difficult for a company to make shoes, shirts, or other athletic wear. Forbes has Nike listed as the 18thmost valuable brand in the world, coming in at a value of $27.5 billion.

Disney, on the other hand, benefits from multiple moats. On one hand, the company's brand ranks above Nike, at No. 8 overall, valued at almost $40 billion. But it also owns rights to some of the most popular and lucrative characters of all time -- including all of those falling under the Marvel umbrella, and Star Wars. Additionally, the company's theme parks benefit from the fact that such locations require a great deal of regulatory approval and land.

Add those up, and its easy to see why Disney gets the nod here.

Winner = Disney

Financial fortitude

You can't be blamed for wanting the company you own to return most of its cash to you -- either in the form of share buybacks or dividends. But such an approach would be disastrous to both the company and your own financial health.

That's because every company, at one point or another, will endure difficult financial times. Those that enter such times with lots of cash on hand have options: buying back shares on the cheap, making acquisitions, or -- most importantly -- offering discounts to customers that drive the competition out of business.

Debt-laden companies are in the opposite boat, made fragile by the effects of an unhealthy balance sheet and the limits it imposes on the company.

Here's how these two companies stack up in terms of financial fortitude, keeping in mind that Disney is valued at over twice the size of Nike.

Company

Cash

Debt

Net Income

Free Cash Flow

Disney

$8.0 billion

$14.8 billion

$9.0 billion

$7.6 billion

Nike

$6.2 billion

$3.5 billion

$4.1 billion

$2.9 billion

Data sources: Yahoo! Finance, SEC filings.

Both of these companies have relatively healthy balance sheets, but if I had to choose, I would give the nod to Nike. While Disney should have absolutely no problems with its debt load, I think Nike would be in a more advantageous position if there were an economic downturn, given that it has almost twice as much cash on hand as it does debt -- especially considering the precarious position of Under Armour (NYSE: UAA) (NYSE: UA) -- Nike's chief competitor -- and its balance sheet right now.

Winner = Nike

Valuation

Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.

Company

P/E

P/FCF

PEG Ratio

Dividend

FCF Payout

Disney

20

24

2.0

1.4%

61%

Nike

23

31

1.8

1.3%

28%

Data sources: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.

This is a pretty close race. While Nike is slightly more expensive based on earnings and free cash flow, it appears to be trading at a discount to Disney after factoring in future growth potential (using the PEG ratio). Both stocks also offer similar dividends, and both are healthy -- though Nike's appears to have more room for growth.

In the end, this one is a wash.

Winner = Tie

The winner is...

So, there you have it: This is a tie. For investors who want to focus on the stability of a wide moat, I think Disney is a safer bet at today's prices. On the other hand, for those who want the potential to benefit (over the long run) from a market downturn, I think Nike is the way to go.

While I have little doubt that Nike's business would suffer in a downturn, I think it could outspend and potentially crush Under Armour in the process, given the latter's heavy debt load right now.

Either way, you'd be doing yourself a favor by starting due diligence on both of these excellent companies.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A and C shares), and Walt Disney. The Motley Fool has a disclosure policy.