Guru investors love these brands, and with both stocks off big in 2016, it’s possibly time to make a trade or further your position because both companies are in a dominant position. This is an all-American athletic apparel competition.
Nike (NKE, Financial)
Nike is the largest, most dominant player in the athletic apparel and footwear industry with an $86 billion market capitalization, commanding 62% of the U.S. athletic footwear market.
Nike generates north of $4 billion in net income on $33 billion in sales on a 45% gross margin. The company is one of the few “real brands” on the planet, and has consistently been labeled “The World’s Most Valuable Sports Brand” by the media.
These earned designations also ensure that the company’s stock trades at a higher multiple - historically around 25x.
I like this business because of the ability to raise prices to combat high production costs. Also, consumers have shown an affinity toward Nike products, even forming long lines for pre-leases to pay premium prices for its shoes, like they used to for iPhones. What’s fascinating about Nike is that people collect its shoes like wine, owning them for years as prices rise. While Buffett would call this an unproductive asset, Sneakerhead is a global phenomenon.
Nike has a leading market position in a variety of categories including sportswear ($6.6 billion in annual sales), running ($4.9 billion), basketball ($3.7 billion) and athletic training ($3.8 billion), and with its technology IoT integrations, the future continues to shine bright. There’s no reason Nike shouldn’t become a $200, even $300 billion company in the next decade or so.
Long-term endorsement deals will rise across sports, but along with those payouts to athletes and entertainment stars will mean more and more exposure of the brand and higher prices as international expansion will be the firm's primary long-run growth engine, especially as China becomes the largest economy on Earth. Nike achieved double-digit growth in Greater China, Japan and throughout Europe, while sales across North America market gained 6%. Through September, Nike was the worst price performer on the Dow year to date. That, along with a forward price multiple under 20, is exactly why it is worth owning.
Nike financials (10-year)
- Sales: up 98%
- Income: up 156%
- Book: up 109%
- EPS: up 204%
Gurus Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Steve Mandel (Trades, Portfolio), Frank Sands (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) all own sizable positions in Nike and are all down from their original buy-in prices.
Under Armour (UA, Financial)
Maybe it’s because I live in the District of Columbia and drive by the former Washington Post editor Katharine Graham's residence that is now owned by Under Armour CEO Kevin Plank that I like Under Armour so much, or maybe it’s because I love the stretchy, stay-cool microfiber that helped catapult athletes past cotton fabrics of the 1990s. No, it could have been the crazy commercials the company ran with little kids in football gear yelling “we must protect this house” before the company had any big name endorsements.
I love the underdog success story and Under Armour is 100% that story. Now it has the ability to really push forward to compete head on with Nike and Adidas (XTER:ADS, Financial). “Like Steph Curry with the shot,” Under Armour has been getting better and better. In the future, the company should continue to sign big name athletes away from Nike, leveling the endorsement playing field.
The stock is off 52% year to date, and while it still trades at a high multiple, I believe the company can continue to grow across every important financial aspect. The company is growing a lot faster than Nike, but since the industry is not cluttered at the top and consumers tend to have multiple products from each company, there’s no reason to suggest that Under Armour couldn’t grow at 20-25% without impeding heavily on Nike’s own growth.
Under Armour financials (10-year)
- Sales: up 819%
- Income: up 494%
- Book: up 596%
- EPS: up 290%
Granted, Under Armour does have lower margins than Nike at the bottom line, but its gross margins are actually better and it hasn’t needed to start engineering EPS gains through share buybacks like Nike has done.
Gurus Steven Cohen (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Brand Sands all own over a million shares of Under Armour and are also down from their original buy-in prices.
Valuation
Nike’s earnings will likely double in the next decade, and if it continues to buy back stock, the EPS could see 200% growth, putting that number above $6 per share. At 25x earnings, the price would be $150, which I think is more than likely.
Under Armour’s earnings growth will slow from the blistering pace of the last decade, yet both sales and profit could double by 2022 and it’s anyone’s guess what the price multiple could be on the stock.
Nike is the better buy, but like Buffett eluded to when mentioning his Coke investment, he should have bought PepsiCo too.
Disclosure:Ă‚ I do not have a position in any of the stocks mentioned in this article and have no plans to initiate a position in the next 72 hours.
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