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Nike vs. Under Armour: What’s billed as the biggest sports apparel battle of the decade might be less of a battle than everyone thinks.
Investing in stocks trading at all-time highs is never easy. That’s been the story at MasterCard (NYSE: MA) for the last few years. Investors have continued to question the valuation and whether the stock could move higher.
But certain savvy investors knew that the business has a wide moat and would continue to fend off smaller players.
For that, they have been handsomely rewarded. Shares of MasterCard are up 250% over the last five years, while the S&P 500 is up just 77% over that same period.
Well, there’s another high profile stock trading at all-time highs getting the same, “How can it go higher?” questions.
Nike (NYSE: NKE) shares trade close to $100 a share, which comes after the company released strong earnings earlier this month.
Its chief rival right now is Under Armour (NYSE: UA), which is about a fifth of its size in terms of market cap. The media has built up Under Armour as an up-and-coming Nike rival, with the potential to start taking market share from the industry leader.
Firstly, Under Armour doesn’t have exposure to faster-growing international markets. It generates some 90% of its revenues from North America.
Last fiscal quarter, Nike’s U.S. sales were up 6% year-over-year during the quarter, but the real growth was overseas. Its sales in China were up 17% year-over-year, with Western Europe growing 21%.
Under Armour also has a steep hill to climb as it looks to break into the footwear market. That’s partly because Nike has Michael Jordan on its side. The Jordan brand has had a stronghold in the basketball category for some time now.
There’s also Adidas, which is a key player in Europe. But Nike appears to be stealing market share in Europe, where Adidas continues to lower guidance and Nike continues to grow its revenues across the continent.
One of the reasons that Nike can continue to outperform smaller players is its geographical reach. In fact, for investors looking to play emerging markets, Nike is interesting.
In China, Nike already has a stronghold on market share, but it should also benefit from a growing middle class in other developing countries, such as Brazil and India. It’s also worth noting that China makes up less than 10% of company-wide revenues, so there’s still plenty of opportunity to further tap that market.
With its brand name and size, Nike is able to command a higher price than competitors. But thanks to its size, it can also source manufacturing cheaper. Pretty much all of Nike’s footwear is manufactured outside of the U.S., namely in China and Vietnam, which affords it a lower cost of production.
Hence, Nike generates double-digit profit margins and a return on invested capital that’s over 23%. Meanwhile, Under Armour’s profit margin is in the mid- to high-single digits and its ROIC is just over 13%.
One of the interesting things about Nike is that it’s an innovator, too. Two years ago, Nike was dubbed the No. 1 most innovative company by Fast Company magazine. It continues to invest heavily in research and development, employing various biometric experts and the like, in an effort to make its product more lightweight and breathable.
Along the lines of innovation, wearable technology is one of the hottest areas in tech right now. And Nike has its hand in that cookie jar as well. Its wearable wristband, FuelBand, didn’t do as well as planned, but it still has its popular Nike+ app, which is used to track fitness progress. And Nike plans to integrate the app into the soon-to-be-released Apple Watch.
Let us not forget about Nike’s dividend. Granted, it’s only offering a 1.1% dividend yield, but that’s more than Under Armour’s nonexistent dividend. More importantly, Nike has upped its dividend for six straight years now and is only paying out roughly 30% of earnings via dividends. Its balance sheet is ironclad, where it has enough cash to cover its debt four times over, so more dividend increases should be expected.
Nike has a highly recognizable brand name (and image) and has been a great investment over the last few years. But despite trading at all-time highs, it’s still enticing.
I view Nike as a tech company disguised as an apparel company, but its valuation is more compelling than some tech companies and even more reasonable than Under Armour.
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