Paired Trade: Columbia Sportswear vs. Under Armour

This is the third in a series of recommendations ( MetPro vs. Nalco (MPR) vs. (NLC), Allergan vs. Johnson & Johnson (AGN) vs. (JNJ)), and I actually addressed these two companies last year. While Under Armour (UA) cratered relative to Columbia Sportswear (COLM), it has surged back to about the same relative price level since the two companies recently reported. When I looked at UA a year ago, I saw a very expensive stock and used COLM as an example of a much cheaper albeit less "exciting" company. Now, my relative interest in the two is that I see COLM as dirt cheap. I recently added it to my Top 20 Model Portfolio and increased the position in the Conservative Growth/Balanced Model Portfolio after it reported Q1 EPS and added it late this week to my own holdings. Here are the numbers:

One number that I don't include but is important is the short-interest. COLM has large insider ownership, so the ratio is high relative to the daily trading volume or the "float", but UA is just sky high at 13% of all shares outstanding and may account for the recent doubling of the stock since March.The basic story is clear: UA is growth, while COLM is value. If, like me, you are expecting economic growth to remain weak for quite some time, you would prefer to invest in a company with very modest growth expectation like COLM and not expose yourself to the chance of another collapse in performance (like Q4, when UA sales growth plunged) or expectations. As I said a year ago, UA has high growth, but high inventory and margins as well. In a recessionary environment, expect the company to continue to lower its margins if it wants to grow.(click on chart to enlarge)

I believe that it will be hard for COLM to hit my target of 44 over the next year, but that would represent about 2X "tangible book less cash" plus the cash added back in. In that environment, UA would probably rise, but not as much, unless it can grow its top-line well in excess of 20% throughout 2009. In a more pessimistic environment, COLM downside should be limited, while UA could retrace much of its recent ascent as it struggles with falling margins and reduces its still high inventories (despite some improvement).

Disclosure: Long COLM

Comments

[Ricard:]

Alan,

Thanks for the comparison. I like your methodology - it reminds me of old-school analysis (which no one seems to use anymore).

If I remember correctly, you did a piece on SKX not too long ago. I took that advice and funnily enough, promptly saw the stock shoot up 30% in the past week or so. So many stocks are under-priced these days...

Seems COLM is even more conservatively financed, with a much more robust FCF. I suppose SKX would be a mid-point company between these two you compare - a good growth story with solid (although not pristine) fundamentals.

Seems you found a genuine Ben Graham stock in COLM...I'll have to look at it more closely.

Anyway, thanks again for discussing *opportunity*. There are too many doom and gloomers on SA, even if their points are justified.

May 03 01:35 PM

[Arnbjorn In...:]

Thanks for the trading idea, Alan.

An alternative you might want to consider for the short leg is Lululemon Athletica (LULU). It is a very high end brand (with a much softer image than Under Armour), with even more growth priced in than UA. For instance, EV/Sales is 2.63 and P/TB is 6.72. Like UA, LULU has a lot of short interest and you should have a good look at its chart to see if you have the stomach for shorting it.

May 03 04:07 PM

[Alan Brochs...:]

lulu is new new. I would be afraid of the novelty factor...

I concur, though, with your sentiment. It looks like the shorts got stuffed on this one as opposed to something positive going on fundamentally.


On May 03 04:07 PM Arnbjorn Ingimundarson wrote:

> Thanks for the trading idea, Alan.
>
> An alternative you might want to consider for the short leg is Lululemon
> Athletica (seekingalpha.com/symbo...). It is a very high
> end brand (with a much softer image than Under Armour), with even
> more growth priced in than UA. For instance, EV/Sales is 2.63 and
> P/TB is 6.72. Like UA, LULU has a lot of short interest and you should
> have a good look at its chart to see if you have the stomach for
> shorting it.

May 03 11:05 PM

[Alan Brochs...:]

I never wrote specifically on SKX, but I have been favorably disposed towards shoe companies


On May 03 01:35 PM Ricard wrote:

> Alan,
>
> Thanks for the comparison. I like your methodology - it reminds me
> of old-school analysis (which no one seems to use anymore).
>
> If I remember correctly, you did a piece on SKX not too long ago.
> I took that advice and funnily enough, promptly saw the stock shoot
> up 30% in the past week or so. So many stocks are under-priced these
> days...
>
> Seems COLM is even more conservatively financed, with a much more
> robust FCF. I suppose SKX would be a mid-point company between these
> two you compare - a good growth story with solid (although not pristine)
> fundamentals.
>
> Seems you found a genuine Ben Graham stock in COLM...I'll have to
> look at it more closely.
>
> Anyway, thanks again for discussing *opportunity*. There are too
> many doom and gloomers on SA, even if their points are justified.

May 03 11:07 PM