Nike vs. Under Armour: Which Stock is a Better Buy?

The pandemic has given way to a new lifestyle, with online purchases replacing shopping from retail outlets, and home workouts gaining popularity over gyms and yoga centers. Though many people expect this trend to subside once the coronavirus vaccines are rolled out, the comforts of online shopping and home workouts are expected to remain relevant even after the pandemic, strengthening e-commerce sales and virtual workout sessions.

With increasing awareness regarding personal health since the onset of coronavirus, athletic apparel and footwear manufacturing companies such as Nike, Inc. (NKE) and Under Armour, Inc. (UAA) witnessed staggering growth in their online sales channels internationally. NKE managed to retain its position as the world’s largest athletic shoe manufacturer with a 50% market share, according to Footwear Retailers and Distributors of America. On the contrary, UAA’s capacity to capitalize on the pandemic allowed it to generate robust revenues over the past quarters, beating consensus estimates.

Both companies generated decent returns over the past three years. While NKE gained 127.4% over this period, UAA returned 23.5%. However, in terms of past six-month performance, UAA is the clear winner with 104.4% gains versus NKE’s 49.6%.

But which stock is a better buy now? Let’s find out.

Latest Developments

NKE announced senior leadership changes in the company in July to support Consumer Direct Acceleration (CDA). This is expected to align the company’s long-term growth strategy by enhancing consumer experience across NKE’s owned and strategic partner ecosystem. This strategic leadership change is also expected to accelerate the company’s digital transformation across all operating segments.

UAA, on the other hand, is currently improving its liquidity position to recover from the pandemic disruption, while working toward streamlining the company’s digital presence. In this regard, UAA announced the sale of its MyFitnessPal platform to Francisco Partners for $345 million. The sale proceeds are expected to fund UAA’s long term digital strategy and expand its market reach, ensuring higher returns for shareholders.

Recent Financial Results

NKE’s direct sales increased 12% year-over-year to $3.70 billion in the fiscal first quarter ended August 2020. Brand digital sales grew 82% from the year-ago value, while EPS rose 10% from the prior-year quarter to $0.95. Net income increased 11% from the same period last year to $1.50 billion.

UAA’s net revenues increased slightly year-over-year to $1.43 billion. This can be attributed to 19.2% rise in footwear revenues and a 22.8% increase in accessories revenues, from the same period last year. The company’s net income from operations in the EMEA region increased 85.7% from the year-ago value to $40.83 million, while income from operations in Latin America rose 673.4% to $1.80 million.

Past and Expected Financial Performance

NKE’s net revenue increased at a CAGR of 3.8% over the past five years, while total assets rose at a CAGR of 12% over the past three years. On the other hand, UAA’s revenues grew at a CAGR of 4.1% over the past five years, while total assets increased at a CAGR of 5.6% over the past three years.               

Analysts expect UAA’s EPS to rise 85.3% in the next quarter ending March 2021, and 129.8% next year. The consensus revenue estimates indicate an 18.4% rise in the next quarter, and a 13.2% increase next year.

Comparatively, NKE’s EPS is expected to rise 41.5% in the next quarter ending February 2021, and 28.2% next year. Analysts expect NKE’s revenues to grow 6.9% in the next quarter, and 11.4% next year.

Profitability

NKE’s trailing 12-month revenue is 8.28 times what UAA generates. However, UAA is more profitable with a gross margin of 47.6% compared to NKE’s 43.2%.

Nevertheless, NKE’s ROE and ROA of 29.2% and 7.3% compare favorably with UAA’s negative value.

Valuation

In terms of trailing 12-month price/sales, NKE is currently trading at 5.36x, 72% more expensive than UAA, which is currently trading at 1.50x. NKE is also more expensive in terms of EV/ Sales (5.49x versus 1.67x) and price/ cash flow (67.74x versus 43.16x).

Though NKE is relatively more expensive, the premium valuation is justified given the company’s leadership in the field of athletic shoes and apparel globally.

POWR Ratings

NKE is rated “Strong Buy” in our proprietary POWR Ratings system, while UAA is rated “Neutral”. Here’s how the four components of overall POWR Rating are graded for both these stocks:

NKE has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and “B” for Industry Rank. It is currently ranked #1 out of 34 stocks in the Athletics & Recreation industry.

UAA has a “B” for Industry Rank, “C” for Trade Grade and Buy & Hold Grade, and “D” for Peer Grade. It is currently ranked #20 in the same industry.

The Winner

While UAA boasted impressive returns over the past couple of months, it doesn’t have sufficient market share to compete with industry giant NKE. NKE’s international brand recognition has allowed it to develop its digital channels faster than UAA, thereby registering double-digit growth in revenues from all parts of the world in the last reported quarter.

Furthermore, NKE is currently trading above its 50-day SMA and EMA of $78.05 and $82.73 respectively, indicating solid short-term bullishness. With the second wave of COVID soon expected to hit the US coasts, the demand for athletic apparel for home workouts is expected to rise this winter, driving NKE’s sales through comprehensive digital channels, thereby making it a better pick here. 

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NKE shares were trading at $131.04 per share on Tuesday afternoon, up $0.93 (+0.71%). Year-to-date, NKE has gained 30.32%, versus a 13.89% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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