Measuring Up: Under Armour Versus Nike

Under Armour or Nike? That is the question. To be sure, Nike is just flat out bigger. Its ubiquitous swoosh is unmistakable. But the younger Under Armour is proving it can hold its own (plus I like their logo more). What about when it comes to money, though? Which is the better investment? Are you better off shelling out your hard-earned cash on a few shares of Under Armour (NYSE: UA  ) ? Or is Nike (NYSE: NKE  ) going to win the race for portfolio profits? By taking a look at a few common ratios over time, we can certainly get a better idea of which company may be the better bet.

Return on equity
Warren Buffett likes looking at a company's return on equity because it is a key indicator of not only how profitable the business is, but also how well the company's assets and leverage are being managed. Think about it this way: A company earning $1 million in a given year on $5 million in shareholder's equity is doing a better job than another company earning $1 million on $20 million in shareholder's equity. This is what return on equity tells us. So how do Under Armour and Nike measure up here? Let's take a look:

 

2009

2008

2007

2006

2005

5-Year Average

Under Armour

12.8%

12.5%

21.2%

21.3%

22.1%

18%

Nike

18%

25.4%

22.4%

23.3%

23.2%

22.5%

Source: Capital IQ, a division of Standard & Poor's.

Based on the five year averages here, Nike has the edge. Though both companies are taking Columbia Sportswear's (Nasdaq: COLM  ) 13.1% average to the shed.

Operating margin
When we talk about margins, a good one to focus on is the operating margin, also known as the EBIT margin (earnings before interest and taxes). These are the earnings that take into account the company's operating expenses, and this can tell us how much the company is spending to operate the business. I mean let's face it, earning $1 million isn't going to mean much if it costs you $950,000 to do it. So how do these two compare? Here are the figures:

 

2009

2008

2007

2006

2005

5-Year Average

Under Armour

10%

10.6%

14.2%

13.2%

12.7%

12.1%

Nike

12.8%

13.1%

13.1%

14.1%

13.8%

13.4%

Source: Capital IQ, a division of Standard & Poor's.

A closer battle, but Nike wins this one, too. Columbia Sportswear hits right in the middle, with a five-year average of 12.6%.

Free cash flow margin
Finally, I like to take a look at the free cash flow margin. While slightly more involved, it can really shed light on what the company is actually making once it is all said and done. Free cash flow is one of our favorite numbers to look at. Simply defined as cash flow from operations less capital expenditures, free cash flow is that money that is left after all of the bills have been paid. It is the money that the company can return to shareholders in one fashion or another, be it in the form of dividends, share buybacks, or even reinvesting in the business. The free cash flow margin is a comparison of the free cash flow the company is generating to its revenues. Let's see how the two match up:

 

2009

2008

2007

2006

2005

5 Yr. Avg.

Under Armour

11.6%

4.3%

(8.0%)

(1.0%)

1.7%

1.7%

Nike

6.7%

8.0%

9.6%

8.9%

9.6%

8.5%

Source: Capital IQ, a division of Standard & Poor's.

Not even close here; Nike prevails and runs away with the cash, but Under Armour has had to invest a substantial amount of its cash flow in order to fund growth.

And the winner is ...
All things being equal, when we consider these three metrics in assessing both businesses, Nike is the clear winner. While Nike is the more established company, it is not surprising to see them performing at better levels. Under Armour is still in growth mode and probably will be for some time. While these aren't the only metrics to consider when assessing a business, they can provide a good starting point for further research. To be sure, both are quality businesses and worthy of consideration. But on this day, Nike is the Foolish winner.

Inside Value analyst Jason Moser owns shares of Under Armour. Under Armour is a Motley Fool Rule Breakers pick. Nike is a Motley Fool Stock Advisor selection. Under Armour is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1294453, ~/Articles/ArticleHandler.aspx, 12/22/2014 10:51:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement