The Best Investment in Activewear

Nike (NYSE: NKE  ) is a monster of a company, with a whole lot of international exposure. Yet saturation becomes a worry at some point, not to mention the fact that the company is heavily weighted toward shoes. So why invest in a slow growth shoe company when you can invest in the fast growing apparel market?

Under Armour (NYSE: UA  ) is a smaller, and much more nimble company than Nike. It gets about 70% of revenue from apparel, with nearly 20% from footwear. During Q2, Under Armour's revenues in both North America and internationally went up big; North America revenue rose nearly 23% year-over-year, while international revenue was up 25%.

Wearables creates an opportunity
One of the big opportunities for Under Armour lies in the fact that the "wearables" market remains wide open. Nike has its well-known Fuel band, but Under Armour has yet to make a big splash in this market, though that may well be about to change. Take Under Armour's Tech shirt for example, which has the technology for reading heart rates, and other info, built directly into the shirt.

Another one of Under Armour's big splashes in the wearable tech market is its Armour 39, which is a heart rate monitor chest strap for athletes that even claims to measure willpower. As mentioned, Nike's most compelling offering in the wearable space is its Fuel band. If the success of this device is any indication of how popular wearables are, then Under Armour investors should be very excited. For fiscal 2012, Nike's equipment segment (which includes the Fuel band) profits jumped 18% year over year. In fiscal 2011, this segment saw a 1% decline in profits year over year. 

Increasing exposure
Under Armour also has the potential to get in front of more customers by getting its products in more department stores. Wholesale still makes up 70% of sales, but direct to consumer is up to 30%. This comes as the direct-to-consumer segment saw revenue rise 30% year-over-year last quarter. Thus, the direct to consumer (i.e. e-commerce) segment looks to be very strong, and offers a high-margin opportunity. And if Amazon.com has taught us anything, it's that people prefer shopping online. By selling its products directly to consumers via its website and catalog, Under Armour can keep more of the revenue for itself, versus having to pay the likes of Dick's Sporting Goods and Sports Authority to sell its goods. 

In addition, international holds great potential. Emerging markets sits squarely in Under Armour's sights, namely South America. It plans to launch its brand in South America in 2014, just in time for the World Cup. As of the second quarter, international sales only made up 6% of revenue, but management expects this number to double by fiscal 2016.

In addition to Nike, Under Armour could see increased competition from Lululemon Athletica (NASDAQ: LULU  ) , which is another up-and-coming activewear maker. Lulu is currently heavily weighted toward the women's business in the U.S. While the company is trying to break into the men's activewear market, it still has a long way to go. Both Lulu and Under Armour, however, trade with forward P/E ratios above Nike. Lulu has a price to earnings ratio of 40, Under Armour is at 65, while Nike is at 26. . So, Nike is the cheapest, but it's expected to grow earnings per share the lowest of the three, at only 12.7% annualized over the next five years. Compare this to Lulu's 18.7% and Under Armour's 21%.

Bottom line
If there's one big concern for Under Armour investors, it's valuation. The stock trades at 47 times forward earnings. Yet, the stock does have the growth potential to help it grow into this lofty valuation. So the potential is there, and any pullback would be a great buying opportunity for Under Armour.

The company should be one of investors' focuses when looking for strong growth stocks. Meanwhile Nike's growth story has already played out, and Lulu still has much to prove, including if it can break into men's apparel. 

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