The Walt Disney Company (NYSE:DIS) and CBS Corporation (NYSE:CBS) 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.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DIS to grow earnings at a 7.76% annual rate over the next 5 years. Comparatively, CBS is expected to grow at a 15.43% annual rate. All else equal, CBS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. The Walt Disney Company (DIS) has an EBITDA margin of 29.44%, compared to an EBITDA margin of 21.48% for CBS Corporation (CBS). This suggests that DIS underlying business is more profitable. DIS’s ROI is 14.40% while CBS has a ROI of 15.30%. The interpretation is that CBS’s business generates a higher return on investment than DIS’s.
Cash is king when it comes to investing. DIS’s free cash flow (“FCF”) per share for the trailing twelve months was +2.12. Comparatively, CBS’s free cash flow per share was +0.25. On a percent-of-sales basis, DIS’s free cash flow was 5.88% while CBS converted 0.76% 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
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. DIS has a current ratio of 1.00 compared to 1.80 for CBS. This means that CBS can more easily cover its most immediate liabilities over the next twelve months. DIS’s debt-to-equity ratio is 0.52 versus a D/E of 3.50 for CBS. CBS is therefore the more solvent of the two companies, and has lower financial risk.
DIS trades at a forward P/E of 15.44, a P/B of 3.70, and a P/S of 2.82, compared to a forward P/E of 12.72, a P/B of 9.98, and a P/S of 2.29 for CBS. DIS is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. DIS is currently priced at a -11.76% to its one-year price target of $114.12. Comparatively, CBS is -13.02% relative to its price target of $74.50. This suggests that CBS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for DIS and 2.10 for CBS, which implies that analysts are more bullish on the outlook for DIS.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. DIS has a beta of 1.44 and CBS’s beta is 1.68. DIS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. DIS has a short ratio of 2.20 compared to a short interest of 4.15 for CBS. This implies that the market is currently less bearish on the outlook for DIS.
CBS Corporation (NYSE:CBS) beats The Walt Disney Company (NYSE:DIS) on a total of 7 of the 14 factors compared between the two stocks. CBS is more profitable, generates a higher return on investment and higher liquidity. In terms of valuation, CBS is the cheaper of the two stocks on an earnings and sales basis, CBS is more undervalued relative to its price target. Finally, TWX has better sentiment signals based on short interest.