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What’s the Best Play in the Activewear Market?

Getting active is becoming a larger and larger part of people's lives. And the rise of health-conscious consumers is a big positive for the activewear part of the apparel market. When investors think about the activewear market, they generally gravitate toward the industry leader, Nike (NYSE: NKE  ) , or look towards the fast-growing Under Armour (NYSE: UA  ) . One of the most overlooked players in the industry, however, is Columbia Sportswear (NASDAQ: COLM  ) .

While Nike is considered a footwear company, Under Armour and Columbia focus more on apparel. Apparel and other accessories make up almost 85% of Columbia's revenue, with the other 15% coming from footwear. Footwear is already a large market, but the activewear is up and coming, and has been growing much faster than the broader apparel market. 

Gaining strength
Columbia's second-quarter earnings came in stronger than expected, beating analysts' earnings per share estimates by 59%. The accelerating earnings growth should help work down inventory levels, where a number of warmer-than-expected winters led to inventory buildups. 

Inventory management will be key going forward for the company. And one big positive is that Columbia has been doing a stellar job of managing inventory. Just last quarter, inventory was down 11% year-over-year, with the company expecting inventory levels to remain below 2012 for the rest of fiscal 2013.

Part of this comes as the company is working down its cold weather reliance, which includes the company's Omni Freeze ZERO line. Omni Freeze ZERO is a sweat-activated cooling technology that can be used in any weather, and is the product of four years of research and development. Its other "transitional" products include Performance Fishing Gear and Sorel. 

And the story gets even better. Coloumbia's earnings for 2014 are expected to grow by 19%. This comes as operating margins are beginning to rebound. In 2010, operating margins came in at 7%, while over the trailing-12 months it was up to 8.5%. That's a big positive. What's more is that the company is generating impressive free cash flow, which it can use to buy back shares, or invest in new brands. Over the trailing-12 months, Columbia generated some $200 million in free cash. That's more than $5.80 per share in free cash, which is a 9% free-cash- flow yield. 

The price is right
The company is trading at 19.8 times forward earnings. This seems high, relative to the broader market, but it's well below Under Armour's 41 times, and also below Nike's 21 times. Taking that a step further, the activewear-industry average is 26 times. So, it appears that the case can be made that Colombia is a bit cheap. Its balance sheet also appears to be rather pristine--more than 20% of its market cap is covered by cash on the balance sheet, and the company has zero debt. 

The other interesting thing about Columbia is that the company has impressive international exposure. It only gets about 55% of revenue from the U.S. Meanwhile, Under Armour gets nearly 95% of sales from North America. As the weakness in Europe starts to alleviate, Columbia should manage to get top-line tailwinds. 

Don't be fooled
Nike and Under Armour are great companies, and great stocks, but Colombia has the opportunity to really surprise investors over the long term. Analysts are not fully appreciating the company, with 11 of the 14 analysts following the stock having a Hold rating. Yet, Colombia generates impressive free cash, is working down built up inventory, and has new products that should help reduce its reliance on winter-related product.

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