This year has been challenging for several big-name stocks in the Dow Jones Industrial Average ($DOWI). Among the hardest hit are Nike (NKE) and The Walt Disney Company (DIS), two globally recognized brands that have faced mounting pressures on various fronts, making them two of the worst performers on the index year-to-date.
However, there are signs that the tide may be turning for these beaten-down stocks. Nike and Disney, despite their challenges, have rebounded by over 11% from their 2024 lows, offering a glimmer of hope for investors looking for value plays. These companies are not only dividend payers, but they also boast strong analyst support, with both stocks holding “Buy” ratings. Moreover, NKE and DIS are currently trading at discounts to their mean price targets. With valuations looking appealing and dividends providing income stability, many investors are wondering: Is now the right time to buy into these beaten-down stocks, or is there more pain to come?
In this article, we’ll take a closer look at the recent performance of Nike and Disney, examine the factors behind their decline, and explore whether the worst is truly over for these once high-flying Dow stocks.
The Case For Nike Stock
Founded in 1964, Nike (NKE) stands out as one of the best-known sportswear brands globally. The company primarily focuses on the design, development, marketing, and sale of footwear, apparel, equipment, accessories, and services. It manages its operations through the Nike, Jordan, Converse, and Hurley brands, serving a varied clientele via a mix of wholesale, retail, and digital channels. Currently, its market capitalization is $130.6 billion.
Year-to-date, Nike shares have fallen 20.3%, underperforming the broader Dow’s gain of 11.6%. However, NKE stock has already bounced about 22% from its 2024 low, set in August.
On June 28, Nike stock plunged roughly 20% after the sportswear giant reported weak fiscal Q4 and FY24 results, along with a discouraging FY25 revenue outlook that called for negative growth rates.
The company’s total revenue fell 1.7% year-over-year to $12.61 billion, missing Wall Street’s expectations by $250 million. NIKE Brand sales fell 1% year-over-year to $12.1 billion, while NIKE Direct revenues declined 8%, driven by drops in digital sales and NIKE-owned stores. Converse sales decreased by 18%, while wholesale sales declined by 5%.
In North America, footwear sales fell 6%, apparel increased by 4%, and equipment sales surged 47%, leading to a total decline of 1% in North American sales, amounting to $5.28 billion. At the same time, footwear sales in China grew by 2%, apparel increased by 5%, and equipment sales jumped 28%, resulting in an overall sales increase of 3% in the region. Globally, footwear sales decreased by 4%, while apparel rose by 3%, and equipment saw a 34% increase.
On the other hand, profitability remains robust and exceeds industry levels. Gross margin for the fourth quarter increased by 110 basis points to 44.7%, driven mainly by “strategic pricing actions,” reduced shipping costs, and lower warehousing expenses, significantly exceeding the sector median of 37.24%. NKE’s EBITDA, net income, and levered FCF margins over the trailing twelve months are also well above the sector median levels. As a result, Nike’s adjusted earnings per share were reported at $1.01 in Q4, beating analysts’ expectations by $0.17.
It’s also worth noting that the company’s growth faltered in FY24, with total revenues increasing by only 0.3% year-over-year. North America, which contributed 43% of total revenue, experienced a decline of 1%, while the EMEA region, accounting for 28%, grew by 1% in FY24. Also, China sales, which accounted for 15% of total revenues, notched a 4% year-over-year growth, signaling recovery after two years of negative growth in the Chinese market.
The company’s weak top-line performance may have compelled management to launch a multi-year initiative to reduce costs by $2 billion. This strategy involves discontinuing certain underperforming product lines and laying off hundreds of employees as part of a broader cost-cutting effort.
Meanwhile, the biggest risk I perceive for Nike is the rising competition. Established firms such as Deckers Outdoor (DECK), which successfully rejuvenated its HOKA running brand, and newcomers like On Holding (ONON), known for their innovative CloudTec cushioning system, have quickly captured market share to the detriment of legacy players like Nike. This suggests that Nike may either enter a price war or significantly increase its advertising and strategic partnerships with athletes, leading to higher costs and lower margins.
Also, it’s important to consider macroeconomic factors, such as more cautious consumer spending. In the latest earnings call, management expressed concerns about the fiscal year 2025 outlook, anticipating that first-quarter revenues will decline in the high single-digit range and full-year revenues will decrease in the mid-single-digit range. However, Nike is not the only company facing a bleak outlook for 2024-2025. Many other apparel companies accustomed to reporting robust revenue growth, such as Lululemon (LULU), have voiced concerns over weaker demand and deteriorating macroeconomic conditions.
Additionally, the footwear giant’s shares are currently trading at a price-to-earnings ratio (TTM) of 21.85x, close to the lowest level in a decade, indicative of the prevailing pessimism about the company.
Finally, it is crucial to note another headwind affecting Nike’s performance: China and its slowing economy, not to mention the ongoing economic tensions between the U.S. and China.
Combining macroeconomic challenges with Nike’s struggles to keep pace with competitors, the likely outcome is reduced growth and a declining market share.
Analysts tracking Nike project a 23.04% year-over-year decrease in its earnings to $3.04 per share for fiscal 2025, with revenue expected to drop 4.77% year-over-year to $48.91 billion.
However, there has been some recent positive news for the stock. Nike shares jumped over 6% last Friday following the announcement that Elliott Hill would return as President and Chief Executive Officer, effective Oct. 14. Hill held various senior leadership roles across Europe and North America during his tenure at Nike, and retired after serving as President of Consumer & Marketplace in 2020. Looking ahead, Hill expressed his eagerness to reengage with the employees and partners he collaborated with over the years, build new relationships, and continue to deliver innovative products that distinguish Nike in the marketplace.
“Given our needs for the future, the past performance of the business, and after conducting a thoughtful succession process, the Board concluded it was clear Elliott’s global expertise, leadership style, and deep understanding of our industry and partners, paired with his passion for sport, our brands, products, consumers, athletes, and employees, make him the right person to lead Nike’s next stage of growth,” said Mark Parker, Executive Chairman of NIKE, Inc.
Also, Bill Ackman’s Pershing Square disclosed a nearly $230 million investment in Nike, acquired during the second quarter.
In addition, potential upside for Nike stock could also arise from share repurchases and dividends. Over the past five years, share repurchases have contributed to a nearly 40% increase in EPS, and management has raised the dividend by approximately 70%. Nike stock offers a forward dividend yield of 1.71%. Notably, the company boasts a track record of paying dividends for 34 consecutive years, far exceeding the sector median of 2.9 years.
Analysts display cautious optimism towards Nike stock, as evidenced by a consensus “Moderate Buy” rating. Out of the 31 analysts covering the stock, 14 recommend a “Strong Buy,” 15 advise a “Hold,” and two maintain a “Strong Sell” rating. The mean target price for NKE stock is $89.59, indicating expected upside potential of about 3.5% from its Friday closing price.
The Case For Disney Stock
Headquartered in California, The Walt Disney Company (DIS) is a global leader in entertainment, providing a wide array of media, entertainment, and consumer products. Disney, with a market capitalization of $170.9 billion, is a dominant force in the industry, famed for its iconic films, television networks, theme parks, and streaming services.
Shares of the entertainment giant have gained 3.7% on a year-to-date basis, trailing behind the Dow’s gain over the same period. Notably, Disney stock has risen 11.7% from its August 2024 low.
Disney stock experienced a significant drop from its all-time high of around $200, achieved in early March 2021, with the sell-off being driven by multiple factors. First, Disney’s streaming business has been experiencing slowing subscriber growth and increasing competition. Second, the linear TV business has also faced poor performance recently due to decreased advertising and a drop in affiliate revenues in the domestic market. Finally, although the theme park business has performed well since reopening post-COVID-19, the near-term outlook appears mixed, with Disney anticipating higher costs and a normalization in attendance.
In 2024, Disney’s troubles began in May, when the company reported weaker-than-expected Q2 revenue and provided disappointing Q3 guidance. Despite reporting stronger-than-expected Q3 results in early August (total revenue increased by 3.7% year-over-year to $23.16 billion, exceeding expectations by $70 million, while adjusted EPS was $1.39 compared to the consensus estimate of $1.19), comments from management regarding the Experiences segment, which includes theme parks and cruise liners, triggered a sell-off in DIS stock. The company observed a slowdown in demand within that segment in Q3 and anticipates that the “moderation” in its domestic business will continue over the “next few quarters.” Notably, revenue from Parks & Experiences increased by only 2% year-over-year to $8.4 billion, yet operating profit fell by 3% to $2.2 billion. Disney attributed the slowdown to factors including the Olympics and China’s sluggish economy, and noted that while high-income customers have recently opted for international travel, those in the lower-income bracket are financially strained due to high inflation.
However, there are several factors that could propel Disney stock upward, suggesting that the worst may be over. Disney has increasingly concentrated on enhancing profitability within its streaming business. Disney’s three primary streaming services, Disney+, Hulu, and ESPN+, recorded approximately $47 million in operating profits for the third quarter, compared to a loss of $512 million in the same period last year. Notably, total Disney+ subscribers were reported at 154.5 million, slightly below the consensus of 154.6 million, while total Hulu subscribers increased by 2% to 51.2 million, surpassing the consensus of 50.4 million. Disney anticipates that its streaming business will eventually achieve double-digit margins similar to Netflix (NFLX), and has emulated its competitor by introducing an ad-supported tier and enforcing restrictions on password sharing.
Also, Disney’s theatrical business is experiencing a resurgence, highlighted by the blockbuster success of the new animated movie, “Inside Out 2.” It’s worth noting that “Inside Out 2” is not only the top-grossing movie at the box office this year, but also ranks as the fourth most successful animated film of all time. The significance of Disney’s box office success is immense and extends far beyond its direct contributions to earnings.
Wall Street anticipates that the company will end fiscal 2024 on a positive note, with both top and bottom lines showing growth. Analysts tracking the company predict a 30.85% year-over-year increase in its earnings to $4.92 per share for fiscal 2024. Additionally, analysts expect Disney’s revenue to grow 2.62% year-over-year to $91.22 billion in FY24.
Similar to Nike, the company pays dividends. On July 25, Disney paid its shareholders a semi-annual dividend of $0.45 per share, marking a 50% increase from the previous dividend of $0.30 paid in January. Its annualized dividend of $0.90 per share translates to a dividend yield of nearly 1%.
Disney also looks attractive from a valuation standpoint. Priced at 18.93 times forward earnings, the stock is trading at a significant discount compared to its five-year average of 42.37x.
Wall Street analysts are quite optimistic about Disney stock, as indicated by a consensus rating of “Strong Buy.” Out of the 27 analysts covering the stock, 17 recommend a “Strong Buy,” four suggest a “Moderate Buy,” and six assign a “Hold” rating. The mean target price for DIS stock is $115.78, which is roughly 23.5% above Friday’s closing price.
The Bottom Line
Although both Disney and Nike may continue to underperform in the near term, I believe that DIS stock represents a solid buying opportunity at current levels, and could provide patient investors with strong returns over the next few years. Regarding NKE, it remains uncertain how the company will address its main challenges just yet, so it would be wise to avoid this Dow stock at the moment.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
