Better Buy: Disney vs. Mattel

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Both Walt Disney (NYSE: DIS) and Mattel (NASDAQ: MAT) are owners of iconic entertainment brands, but their stock prices have moved in opposite directions in recent years. Disney stock jumped higher this year after the company impressed investors with its plans to take its popular movie franchises to a digital audience with Disney+ this fall.

Meanwhile, Mattel's Hot Wheels and Barbie brands are performing well, but the company is saddled with debt and is unprofitable. That has led to a dramatic 72% plunge in the stock price over the last five years.

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But sometimes what goes down comes back up. Mattel stock has rebounded by 9% so far in 2019 as management implements a promising strategy to right the ship.

Should you stick with a steady performer like Disney, or take a chance on Mattel's turnaround? Let's find out.

What you get with Disney

Disney stock may not make you rich, but the House of Mouse should be a rewarding investment for years to come.

Disney has a powerful business strategy that connects its iconic characters and stories to many different areas of consumer spending -- toys, games, movies, theme parks, hotels, cruise ships, apparel, and a lineup of digital streaming services, including Hulu and ESPN+.

The company's run at the box office over the last decade was beyond impressive, boosted by the acquisitions of some of the most valuable entertainment content in the world with Lucasfilm's Star Wars and the vast library of Marvel Entertainment characters.

Disney is the first company to ever make $7 billion in a single year at the box office, and it did it again last year. Disney estimates it has 1 billion fans around the world, and they can't get enough of Star Wars and Marvel. On top of the string of monster hits in recent years, Avengers: Endgame (2019) just made $2.7 billion worldwide at the box office. There are several more releases coming throughout the year, including another big one in Star Wars: The Rise of Skywalker.

In 2018, fans bought 900 million tickets to see Disney movies, and 300 million of those were for Avengers: Infinity War. Management believes that demand will carry over to its new streaming service Disney+, launching in November of this year, which will be the home of every Star Wars movie, and new exclusive content from Star Wars, Pixar, Marvel, and National Geographic.

Also, there are plans to continue investing in Hulu, in which Disney is now the majority owner, including international expansion. ESPN+ is off to a good start, too, having reached 2 million subscribers since its launch last year.

Disney is a mature company investing like a tech upstart, which promises a bright future for the Magic Kingdom. But this will require substantial investment, which means there will be a lack of earnings growth until Disney+, Hulu, and ESPN+ reach profitability, which management expects will happen by fiscal 2024 (which ends in September).

Analysts currently expect Disney to grow earnings by just 2% per year over the next five years because of the investments in digital initiatives. However, the stock could still move higher from here. For example, Netflix didn't generate much profit for several years as it invested aggressively in content, yet investors were willing to give the streaming giant credit for its revenue growth, expecting that the company would show a profit down the road.

Investors will likely give the same credit to Disney -- especially because management has dangled the carrot in front of the stick, calling for Disney+ to reach between 60 million and 90 million subscribers by fiscal 2024.

Is Mattel worth the risk?

So investors know what they are getting with Disney -- a global entertainment powerhouse that can steadily grow revenue and pad your brokerage account with dividends.

The thing about Mattel is that the stock trades at a significant discount to its main rival Hasbro. Mattel's price-to-sales ratio is currently 0.83, while Hasbro's is 2.66. Shares of Mattel can close that gap over time and deliver market-beating returns to investors if the company can continue showing the progress on its turnaround plan that it demonstrated over the last few quarters.

The first quarter was Mattel's third consecutive quarter of improving profitability and gross margin. Currency-neutral sales were up 1% year over year last quarter, and while the company still posted a loss on the bottom line, the operating loss narrowed by $146 million.

Analysts expect adjusted earnings to improve from a loss of $1.14 per share in 2018 to a loss of $0.40 per share this year. By 2020, analysts expect Mattel to turn a profit of $0.09 per share. The consensus estimate calls for adjusted earnings to grow 10% per year over the next five years, which means Wall Street is starting to buy into Mattel's turnaround story.

Beyond progress on reducing costs and growing sales, management has big plans to drive long-term growth, including turning the company's most valuable toy brands into live-action movies. This effort is building momentum, with partnerships already announced with MGM, Sony, and Warner Bros. studios.

Which is the better buy?

The risk with Mattel is that sometimes turnarounds don't turn, but the toy maker is showing the early signs of being one of those that complete the turnaround. It continues to be a partner of choice for Disney's Toy Story and other franchises to make licensed toys, and Mattel's partnerships with top Hollywood studios alludes to the inherent value of its toy brands.

I usually draw the line somewhere between two stocks, but I do believe the potential reward in Mattel is worth the risk, so I'll leave it at this: If you don't own shares of either stock, you should consider buying Disney first, as it has much lower business risk than Mattel. However, if you already own shares of Disney, you might want to consider a small investment in Mattel to potentially juice your returns.

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