Nike (NKE +0.09%) and Under Armour (UAA +0.00%) (UA +0.33%) are two of the world's biggest brands in sporting goods. Together with Adidas, they dominate an athletic apparel and footwear industry that's estimated to grow to nearly $185 billion by 2020, according to Allied Market Research.
But which of their stocks is the better buy today?
Image source: Getty Images.
Competitive strength
Both Nike and Under Armour have recently seen their sales dented by the bankruptcies of multiple sporting goods and footwear retailers in the United States. But because international markets provide more than 60% of Nike's revenue -- compared to only 24% for Under Armour -- Nike has weathered the domestic storm better than its smaller rival.
Nike has enjoyed strong growth in the greater China market, where sales rose 35% in the fourth quarter year over year. Its other major international divisions, Asia Pacific/Latin America and EMEA (Europe, Middle East, and Africa) also delivered double-digit revenue growth over the year-ago period. Together, this helped boost Nike's revenue by 13% -- its fastest growth in 14 quarters -- to $9.8 billion.
Under Armour has also grown sales robustly in its international division -- they rose 27% in its most recently reported quarter. But given that U.S. sales still account for nearly three-quarters of Under Armour's total revenue, the impact of this growth was more muted. Under Armour's company-wide revenue rose only 6% to $1.2 billion.
As such, Nike's global reach gives it a powerful competitive advantage over Under Armour. Nike's massive scale also allows it to spend more on marketing, which it appropriately refers to as "demand creation." It's stable of athlete endorsers is unmatched, and its brand is well-represented at most major sporting events. This makes it difficult for rivals to displace Nike from its dominant position atop the global sports apparel and footwear markets. And it's why I'd argue that Nike is the more competitively advantaged business when compared to Under Armour.
Advantage: Nike
Financials
Let's now take a look at some key financial metrics to see how Nike and Under Amour stack up.
|
Metric (TTM) |
Nike |
Under Armour |
|---|---|---|
|
Revenue |
$36.38 billion |
$5.04 billion |
|
Operating income |
$4.45 billion |
$165.7 million |
|
Net income |
$1.93 billion |
($76 million) |
|
Operating cash flow |
$3.64 billion |
$289 million |
|
Free cash flow |
$2.54 billion |
$43 million |
|
Cash |
$5.25 billion |
$284 million |
|
Debt |
$3.81 billion |
$921 million |
TTM is trailing 12 months. Data sources: Nike, Under Armour.
When it comes to financial strength, this better buy battle is particularly lopsided. Nike's sales are seven times larger than Under Armour and it boasts $1.9 billion in net income over the past year, while Under Armour has struggled to generate consistent GAAP profits.
Moreover, Nike is a cash-generating machine, with $2.54 billion in free cash flow compared to only $43 million for Under Amour. And with more than $1.4 billion in net cash in its coffers, Nike's balance sheet is far superior than that of Under Armour, which has more than $637 million in net debt.
In addition, Nike's healthy finances allow it to regularly reward shareholders with dividends and share repurchases. In fact, it recently authorized a new four-year, $15 billion stock-buyback program to complement its dividend, which currently yields 1%. Under Armour, on the other hand, does not pay a dividend, and reinvests most of its operating cash flow back into its business.
For these reasons, Nike is the clear leader in terms of financial fortitude.
Advantage: Nike
Growth
With Under Armour being the smaller business, you'd expect it to be growing faster than Nike -- but you'd be wrong.
Nike's revenue is projected to rise by 8.1% in its current fiscal year (FY 2019) and 7.3% the following year, fueled by new product launches and the continued growth of its international operations.
Under Amour, meanwhile, is expected to increase its sales by only 4.3% in 2018 and 6.8% in 2019, as it works to right the ship in its core North American market.
So, even though Nike is the far larger business, it's actually expected to grow at a faster pace than Under Armour in the near-term.
Advantage: Nike
Valuation
Lastly, let's take a look at some key stock valuation ratios.
|
Metric |
Nike |
Under Armour (A Shares) |
|---|---|---|
|
P/S (TTM) |
3.40 |
1.79 |
|
P/FCF |
48.69 |
205.97 |
|
Forward P/E |
24.67 |
54.64 |
Data source: Yahoo! Finance.
Nike's shares are more expensive than Under Armour in terms of price-to-sales. This makes sense, because Nike is the far more profitable business, with an operating margin of 12.2% over the past 12 months, compared to only 3.3% for Under Armour.
Nike's stock is significantly cheaper, however, on both a price-to-free-cash-flow and price-to-earnings basis. Ultimately, the things we're after as investors are profits and cash flow, so I'd argue that Nike is the better bargain.
Advantage: Nike
The better buy is...
It's a clean sweep for Nike. With its stronger competitive position, superior financial strength, greater revenue growth, and more attractively priced stock, this sports apparel champion is the better buy today.
