Should You Pick Disney Over UPS Stock?

Given its better prospects, we believe Disney stock (NYSE: DIS) is a better pick than UPS stock (NYSE: UPS). The decision to invest often comes down to finding the best stocks within the scope of certain characteristics that suit an investment style. In this case, although these companies are from different sectors, they share a similar revenue base of around $90 billion. DIS trades at a higher valuation of 2.1x trailing revenues, compared to 1.3x for UPS, and we think that this valuation gap will likely expand further over the coming years in favor of Disney, given its superior revenue growth and profitability. In the sections below, we discuss why we think Disney will outperform UPS in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. Both UPS And Disney Have Underperformed Broader Markets In The Last Three Years

UPS stock has faced a decline of 20% from levels of $170 in early January 2021 to around $135 now, while DIS stock suffered a decline of 45% from levels of $180 to around $100 over the same period. This compares with an increase of about 45% for the S&P 500 over this roughly three-year period.

However, the decrease in UPS stock has been far from consistent. Returns for the stock were 27% in 2021, -19% in 2022, and -10% in 2023, while DIS stock gave returns of -15%, -44%, and 4% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UPS underperformed the S&P in 2023 and DIS underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UPS and DIS see higher levels? While we think both stocks will see higher levels over the next three years, Disney will likely fare better.

2. Disney’s Revenue Growth Is Better

Disney’s 11% average annual growth rate in the last three years is much better than 3% for UPS.

UPS saw its revenue rise from $84.6 billion in 2020 to $90.6 billion in 2023. The revenue growth for UPS was driven by e-commerce growth and better price realization. However, the sales growth has slowed lately due to a weakening consumer spending environment. For perspective, UPS saw its average daily package volume decline by 10% for domestic and 8% for international packages in the last three years. Our UPS Revenue Comparison dashboard provides more insight into the company’s sales. UPS expects its 2024 revenue to be in the range of $92 billion to $94.5 billion.

Disney’s sales grew to $88.9 billion in 2023, versus $65.4 billion in 2020. For Disney, the sales growth has been driven by the company’s theme park business, which saw footfalls and average spending rebound in recent years, as Covid-19 lockdowns were eased. Higher revenues from the streaming business have also contributed to its top-line growth. Disney has seen a rise in number of subscribers and average revenue per user for its streaming business. Look at Disney’s Revenue Comparison dashboard for more details.

Looking forward, both Disney and UPS are likely to see their revenue expand in mid-single-digits over the next three years.

3. Disney Is More Profitable But UPS Offers Lower Financial Risk

UPS’ operating margin increased slightly from 9% in 2020 to 10% in 2023, while Disney has seen its operating margin expand from 6% to 10% over the same period. UPS’ operating margin has been trending downward in recent quarters, due to higher operational expenses, primarily fuel, and declining volumes. Moreover, the impact of the labor deal with the Teamsters Union that was ratified in August last year has put pressure on UPS’ margins lately.

Looking at the last twelve-month period, Disney’s operating margin of 11% fares slightly better than 10% for UPS. Coming to financial risk, UPS fares better, with its 21% debt as a percentage of equity being lower than 25% for Disney, and its 9% cash as a percentage of assets is higher than 7% for the latter. This implies that UPS has a better debt position and more cash cushion.

4. The Net of It All

We see that although UPS has a better financial position, Disney has seen superior revenue growth and is more profitable. Now, looking at prospects, we believe Disney is the better choice of the two, given its lower valuation. We estimate UPS’s valuation to be $163 per share, reflecting an upside of around 20% from its current levels of $135. Our forecast is based on a 20x P/E multiple for UPS and expected earnings of $8.25 on a per-share and adjusted basis for the full year 2024. The 20x figure compares with the 19x average value over the last three years. On the other hand, we estimate Disney’s Valuation to be $137, reflecting over 35% upside from its current market price of $100.

Although both stocks will likely face headwinds from a mixed economy and weaker consumer confidence, we think Disney is better placed with an attractive valuation and robust demand for its streaming as well as theme parks business.

While DIS may outperform UPS in the next three years, it is helpful to see how UPS’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/14/2024
[2] Cumulative total returns since the end of 2016

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