Nike (NKE, Financial) and Under Armour (UA, Financial) are two stocks that I think every serious investor in the retail space should have in their portfolio. There are several reasons why I believe this, but let’s explore the most important ones here.
The Sports Footwear and Apparel Markets Are Huge, but Fragmented
Transparency Market Research estimates the overall value of the global footwear market to grow at a CAGR of 2.3%, from $208.72 billion in 2014 to $258.21 billion by 2023.
Allied Market Research says the world sports apparel market will hit revenues of $184.6 billion in 2020, growing at a CAGR of 4.3% during 2015 to 2020.
At a combined estimate that will exceed $400 billion over the next several years, the footwear and apparel markets have ample room for growth. An exploding global population, increasing disposable incomes and rising health awareness are just some of the factors that will drive that growth.
But despite the humongous size of the market, the market leader in the segment - Nike - made only $32.37 billion in sales last year, while Under Armour made $3.96 billion. Together, the market leader and the fastest growing company in the segment do not even hold 20% of the market.
The reason is simple, the segment itself is highly fragmented, with plenty of regional players eating small slices of the revenue pie all over the world. There is no single brand that is in control. Not just yet.
Now when you look at the segment from this point of view, you can understand why Nike remains confident that it will hit $50 billion in sales in just four years, while Under Armour stands firm on its commitment of hitting $7.5 billion in sales by 2018. Judging by their relative market sizes, it is clear that these are not unachievable targets, even if the market itself stops growing.
The other key reason these two stocks should be in every retail investor’s portfolio is their respective financial positions.
The Balance Sheet Angle
Apart from the ample growth opportunity that lies ahead of these companies, there is one more similarity between the two. Nike and Under Armour are financially well-managed companies, and the kinds that do not believe that you need leverage to fuel your growth.
At the end of the most recent quarter, Nike had $5.4 billion cash on hand with long-term debt of $2.01 billion, while Under Armour reported $121 million cash on hand with $838 million in long-term debt. Though Nike’s numbers look a lot better than Under Armour’s, with $409 million in annual operating income that has doubled every three years since 2006, UA’s balance sheet looks strong enough.
A clean balance sheet, strong past performance and a segment that has another decade of growth runaway makes both these companies extremely attractive investments. Nike is trading at 3.2 times sales while Under Armour trades at 4.2 times. Under Armour does look a bit expensive at this price point but as hyper growth company, the valuation will inevitably remain on the higher side. The bigger it gets, however, the lower the price to sales ratio must become.
Adding small positions over a period of time instead of buying in one go should allow you to build into a strong position at a much better price, especially in the case of UA. The best part is, you can hold both these stocks forever because they represent a duopoly that has not yet grown into itself.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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