Nike Inc. NKE and The Walt Disney Co. DIS are two powerful brands in the middle of a business model transformation that could deliver value to their shareholders.
That's according to John Zolidis, the president of Quo Vadis Capital, who has been closely following the two companies.
"We believe Nike and Disney are two of most well-known, most respected, and most powerful global consumer brands," he said. "They are also two companies currently undergoing business model transformations that we expect to accrue value to shareholders."
Zolidis' call should be music to the ears of long-term shareholders of both companies, which have delivered strong total annual returns over the last decade.
| Disney | Nike | |
| Three-year Revenue Growth (%) | 1.2 | 5 |
| Three-year EBITDA Growth (%) | -35.5 | -6.3 |
| Current Operating Margin (%) | 5.83 | 9.67 |
| Market Price | $178.13 | $142.48 |
| Intrinsic Value | $110.59 | $88.88 |
| Economic Profit (ROIC-WACC)% | -5.62 | 12.16 |
| Average Annual Total Return (2010-2020)% | 17.36 | 22.18 |
Still, a model transformation is something the two companies badly needed as competition and the Covid-19 pandemic have slowed down their growth recently.
Nike has been facing competition from Adidas (XTER:ADS) and lockdowns that prevented consumers from buying its products at retail stores. Disney has been facing competition from streaming giants like Netflix (NFLX) and Amazon (AMZN). It has also been impacted by closed theaters—a traditional way to release new movies.
The solution? Nike shifted to a direct-to-consumer distribution model from a wholesale distribution model. This means that it cut the middlemen as well as the markup that has been cutting into the company's bottom line.
"In the wholesale model, Nike marks up his products to sell to retail partners, which in turn add another mark-up to sell to the end consumer," Zolidis said. "In the direct-to-consumer model, aided by the digitalization of the consumer, Nike sells direct to the end consumer at the same price as its retail partners, keeping both mark-ups."
That certainly means higher profit margins and increased cash flows for Nike, and eventually higher returns for stockholders.
Meanwhile, Disney decided to compete head to head against Netflix by changing the way it distributes movies, including new releases.
"For Disney, the transformation is related to shift in distribution of movies and sports content (DIS owns ESPN) via subscription based streaming services (Disney+ and ESPN+) from landlocked cable, third party streamers (Netflix) or in theaters," Zolidis said.
With Disney+ signing up 87 million subscribers in the first year, the rest is history. The company's shares reached an all-time high in recent trades on Wall Street.
And things are expected to get better once the company's theme parks fully open up to the public and it fires on all cylinders.
Still, investors should temper their enthusiasm for both stocks as they have reached valuations that leave no room for error. Disney is trading at a price that is more than 50% of its intrinsic value, while Nike trades at a price close to 50% higher than its intrinsic value.
Disclosure: I own shares of Disney and Nike. John Zolidis owns shares of both Nike and Disney.
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