In this article, I will run you through my comparable analysis for both Nike Inc. (NYSE:NKE) and Under Armour Inc. (NYSE:UA) with a conclusion to buy one and sell the other. These quick analyses serve as an introduction only, and your further research is still warranted.
Nike - Bullish
Shares of NKE have declined 18.44% over the past 3 months, primarily owing to the downbeat sentiment regarding its recent M&A transactions and the miss on Q4 2012 earnings. I believe the plunge has created an excellent buying opportunity for this global sportswear giant.
Compared with its major competitors worldwide (see below), NKE has a superior profitability, as measured by many of the return margins. Its solid FCF margin and low debt level also stand above the group average, and the high level of interest coverage as well as current and quick ratios suggests the firm has ample liquidity to weather any temporary demand slowdown. Although NKE is expected to experience a relatively slower growth than the group averages, considering its substantial market share, well-established brand equity, and solid global presence, the stock should at least warrant an on-par valuation relative to its peers. However, the current stock price of $90.28 actually implies a 15.5% valuation discount on both the peer average P/E and EV/EBITDA multiples, suggesting NKE is likely being over-discounted for its slower growth potential.
Additionally, NKE's solid FCF generating capability has allowed the company to continue paying dividends and buy back shares over the last decade (see below). Dividend per share has never been reduced since 1991, reflecting management's strong commitment to increasingly return capital to shareholders. Thus it is reasonable to anticipate that the dividend payout and share repurchase can be sustained down the road.
Under Armour - Bearish
Although UA shares have had a solid gain of 16.02% over the past 12 months, I believe the lofty valuation is poised for a significant correction ahead.
Consensus estimates predict revenues, EBITDA, and EPS to rise significantly by 22.3%, 26.4%, and 27.5%, respectively, over the current and next fiscal years (see below). These help fuel an over-optimistic sentiment on the stock as it currently trades at 1.6x PEG, a substantial premium over the growth prospects. In addition, except for its higher growth potential, UA has a mediocre profitability and liquidity position relative to its peers (see below). At $92.25 per share, UA trades at 18.2x the NTM EBITDA and 37.6x the NTM EPS, implying a whopping 113.9% valuation premium over both the peer average P/E and EV/EBITDA multiples, which is hard to justify with the firm's current fundamentals.
In conclusion, I recommend acquiring NKE shares at the current price given its cheap valuations and solid fundamentals, which provide a fair margin of safety. Conversely, investors should avoid UA as the escalated valuations are priced for continuously high growth ahead and have limited support from other fundamentals, thus deemed to be risky.
Comparable analysis tables are created by author, data charts are sourced from Capital IQ, and all financial data is sourced from Morningstar and Capital IQ.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NKE over the next 72 hours.