At $55 per share, the stock price for Nike Inc. (ticker: NKE) is almost three times higher than Under Armour Inc ( UA, UAA), but that doesn’t necessarily mean it’s a better bet for investors going forward.
Or does it?
Given the high stakes in the sports apparel market, it’s worth comparing what each company offers investors in profit potential in the future. And it’s a fair question for investors mulling over an investment in the two largest athletic apparel companies in the U.S.
[See: 7 of the Best Stocks to Buy for 2017.]
The case for Nike. Through March, Nike stock slid by 6 percent on a year-to-year basis, but financial performance could well be driving future growth. Fourth-quarter revenues popped up 6 percent to $8.2 billion, while yearly revenues for 2016 also finished up 6 percent. Long-term growth has impressed as well. According to data from Zacks.com, Nike’s share price has risen from $17 per share in 2007 to the mid-$50s, with a consensus analyst one-year target price of $62 per share.
The company is navigating some choppy waters of late. On April 4, Argus downgraded Nike stock, contributing to a 1 percent price decline over the next 24 hours, joining Bank of America/Merrill Lynch, which cut NKE from “neutral” to “underperform” in late 2016. But Nike stock has shown resiliency on a year-to-date basis and is up 8.8 percent for the year — well ahead of the Standard & Poor’s 500 index, which stands at about 6 percent.
“I am firmly in the Nike camp, a stock which I have owned for 15 years,” says Tom Weary, chief investment officer at Lau Associates in Greenville, Delaware. “Nike has been around a lot longer and already made a successful transition from the founding CEO, weathering many challenges, such as the controversy several years ago regarding the labor practices of their overseas contractors. Under Armour is a young company run by a young founder and is facing its first major financial stumbles.”
“On a number of parameters — valuation, yield, quality, stability, Nike appears to me to be the superior stock at this time,” Weary says.
Others have a similar outlook.
“Nike’s leadership over Under Armour goes beyond its stock value,” says Jason Quey, founder and owner of The Storyteller Markets, who follows both companies from a marketing point of view.
Quey points that Nike was the “first” athletic shoe brand, and more importantly, it has remained the leader in the mind of customers because of its sponsorships with sports leaders like Lebron James, Cristiano Ronaldo and Kevin Durant.
“Their slogan is as iconic as their logo: ‘Just do it,'” Quey says. “What’s Under Armour’s slogan? If you didn’t know it, it’s ‘I will.’ A future possibility isn’t as strong as a present challenge. So right there, Nike wins again.”
Purely looking at analyst recommendations, 60 percent rate Nike as a “buy” while 60 percent rate Under Armour as a “hold,” says Eric Ervin, CEO at Retirement Shares. “While both companies face continued margin pressure and competition from Adidas and others, Nike is better positioned to deliver profits to investors in the next 12 to 18 months.”
Ervin describes Nike as “one of the healthiest dividend-growing companies in the S&P 500, and this bodes well for investors in the long run.”
[Read: 8 Unsexy Stocks With Super-Sexy Returns.]
The case for Under Armour. First the downbeat news on UAA: Under Armour’s revenue growth will drop below 20 percent for the first time since 2009, Ervin says.
“Operating income is being pressured due to the company’s physical and online retail expansion efforts, and its connected fitness segment is still unprofitable (not a good sign as fitness becomes increasingly high-tech),” he says. “Sporting goods bankruptcies are also pressuring revenue growth. Only 15 percent of Under Armour’s sales are outside the U.S., well below its competitors, and the company will need to greatly improve its international profit-generating efforts. The company does not currently pay a dividend, also making it less attractive compared to Nike.”
Yet while Under Armour’s stock has been in decline so far in 2017 (it’s down 30 percent on a year-to-date basis), some analysts seem more bullish on UAA heading into the spring and summer outdoor sporting seasons.
Randal Konick, an analyst at Jefferies, terms UAA’s brand “strong” in a recent research note and advises investors that “now is the time to buy” Under Armour stock.
“Our data analysis indicates a bottom forming in the social sphere for UA,” he says. “The work shows the social share gains at Adidas in ’16 have peaked and provides evidence that UA’s sponsorship strategy is lifting brand heat.”
Investors and Wall Street professionals seem to agree that Under Armour offers a growth aspect Nike can’t compete against.
“Under Armour is a much better investment because Nike has peaked, and Under Armour is a safer investment that has the potential to grow,” says Huseyin Aksu, chief executive officer of Fantasy Couch, a sports media company.
Aksu says UA will continue to grow properly by making the right deals, sponsoring the right athletes and helping the right charities.
“A gradual, low-risk growth is much more likely to happen to your UAA stock rather than your Nike stock,” he says. “To me, it is an easy choice. Go with Under Armour.”
At first glance, a look at UAA’s numbers seem to wane compared to NKE, but Weary says that’s not necessarily the case, depending on whose numbers you use.
“Until Under Armour’s recent stumble, both companies grew earnings per share fairly steadily,” he says. “I model NKE’s future earnings growth at 12 percent and UAA at 13 percent, whereas Wall Street analysts project them to grow at 12 percent and 19 percent, respectively, setting up UAA for greater potential disappointment.”
Overall, Weary views NKE as a “far more profitable company” with a return on equity of 33 percent, which has risen in each of the last three years, versus 13.9 percent for UAA, which has declined in recent years. Plus, NKE stock yields 1.3 percent and Nike has a history of consistently raising the dividend every year, whereas UAA does not pay a dividend. NKE is off about 11 percent from its recent high, whereas UAA is down 56 percent from its peak price.
“Lastly, NKE is trading at 23 times forward EPS versus 45 times for UAA,” Weary says.
Weary concedes that Under Armour has some upside, if only because Nike is a much larger company with 10 times the market capitalization ($91 billion compared to $8.5 billion) and a broader array of products sold in many more markets.
“I suppose one could argue therefore that Under Armour offers more long-term growth potential,” he says.
Under Armour does have something Nike lacks, Quey says.
“Under Armour is a leading company in a growing trend: athleisure,” he says. “If you look at Google trends, people have a growing interest in athleisure. While Under Armour isn’t leading the pack in the broad category of athletic apparel, it is the leader in a growing category, athleisure. And in the end, the marketing battle is won by becoming the leader in the mind of the customer.”
Quey puts it this way: “In my view, if you want to invest in a stock that’s tried and true, go with Nike. If you want to invest in a stock that’s growing, go with Under Armour.”
Of course, there are Wall Street insiders who say there is plenty of profit potential for both companies.
[Read: 5 Reasons to Invest in the Stock Market.]
“We are ‘buy’ rated on both names and believe this is not a winner-take-all scenario,” says Andrew Burns, senior vice president and senior research analyst at D.A. Davidson in Portland, Oregon. “Overall, the athletic footwear and apparel category continues to grow, driven by consumer demand for fashionable, innovative athletic products.”
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Which Stock Is Better: Nike Inc (NKE) or Under Armour Inc? (UA, UAA) originally appeared on usnews.com
