In our addiction to watching a fight unfold, we get picked up by the wave of spectator adrenaline, which runs through the aisles like a tributary. When we're lucky enough to witness two well-matched opponents, it only stokes our fires, giving rise to chanting in stadiums and yelling in arenas. Those moments that raise the hair on the back of your neck and leave you weary the next morning from all the tensing of muscles are the moments we live for.
Investing offers us those moments. While often we invest in the slow, the steady, the slow-burning dividend payer, sometimes we're offered an opportunity to pit one company against another. The joy of merely playing the options out in our minds gives rise to that same blurred vision that comes with a beautiful sporting event. So imagine the damp-palm excitement that comes with throwing Nike (NKE 1.48%) and Under Armour (UA 6.31%) into the ring together.
The background
Like all good match-ups, this one is set against a backdrop of hype. High school football is fun to watch, but unless there's a rivalry on the line, or an underdog, we're just there to watch Timmy throw a touchdown or two. Once we frame it up as a real Game, though, we'll spend the night painting signs in the garage denouncing the lineage of the other school's coach. So while the gentle fire of Under Armour versus Nike has warmed us for some time now, last week's review from JPMorgan is what's making the flames jump out and singe our hairs.
Analyst Matt Boss said, "We believe UA is entering an intermediate growth period in its longer term global growth horizon (from high-growth = 28% trailing 5-year sales CAGR, to more moderate growth in FY13E of ~23.5%) with investment key today for the next phase of growth." In other words, Under Armour gets to play the underdog. Boss is betting that the fight is slipping out of Under Armour's weary limbs. While it's not going to end up at the very bottom of the pile with growth of 24%, Boss is betting that there will be a few players piled on top when the whistle blows.
He also thinks that one of those holding Under Armour down is going to be Nike. He said that "[w]ith annual free cash flow generation of $6.6B for the next 3 years (9.1% yield), Nike's balance sheet is fortress-like today." The imagery he evokes is perfect. There's Under Armour, scrambling up the slowly sloped sides of Nike's shining headquarters, scratching at the crevasses and chips in the panes until its fingertips bleed from the effort. Inside, Nike CEO Mark Parker sips on a latte as the glass holds back the onslaught.
The lineups
Under Armour's chest-thumping pride comes from its feverish desire for innovation. Since its inception in 1996, the company has grown into a multibillion-dollar company. Last quarter it reeled in $575 million in revenue and $57 million in income, which was a 25% increase over 2011. As Boss pointed out, Under Armour has hardly stepped out of the gym over the past few years, and if it were an offensive lineman, we'd be asking it to pee in a cup every week. With Under Armour near the 30% mark for annual growth, Boss now expects it to taper off, as the company focuses on pushing its empire across the globe.
Right now, almost 95% of its revenue is generated in the U.S., and 77% of revenue is generated through clothing sales. Now the company is going to be focusing on geographic growth and revenue diversity. On its last earnings call, management discussed the drive to extend products beyond the company's core of athletes to more casual users searching for innovation in their workouts. The company is also looking to rip market share from competitors, and has already hit the No. 7 spot for share of cleated shoes. But there's still a lot of work left to do.
Meanwhile, Nike has been able to hunker down and play the game that it knows so well. If size were the determining factor, Nike would already be towering over Under Armour's dazed form like Ali over Liston. With $6.7 billion of revenue in its last quarter, Nike, in some sense, has no rivals. But sharp eyes can see that the company is careful to watch its well-armored back. In the statement attached to its earnings release, Parker said, "Innovation is how great companies sustain growth and build competitive separation."
When the dust settles
"Innovation" has been the driving, monotonous chant yelled through bullhorns on rainy practice days at Under Armour HQ. "Innovation," which was mentioned a combined 46 times on the companies' most recent earnings calls. "Innovation," which was the foundation of both companies, and which is going to determine who has the stamina to tear through the finish-line tape first. To me, it's clear that Under Armour is the company where innovation thrives, is taken seriously, and drives every choice.
Nike may never be a poor investment. As it's a juggernaut rolling through small towns, it feels like no one company could ever assemble a force that wasn't simply rolled over by it. But Under Armour has the best shot at slowing the pace, and making a great return for investors in the process. Boss thinks that 2015 is the "sweet spot" for the company, when footwear will play a larger role and cash spent on expansion will finally be paying off -- I think he's wrong. I think 2013 is going to be a growing year for the company but that, like Coach's announcement of slower growth earlier this year, the damage dealt to the bottom line will be less than expected.
