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
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
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.
