Sports Apparel Stocks: Steer Clear Of Those Trading At High Valuations
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The sports apparel industry is interesting, because it offers customers the charisma and glamour of hero-athletes by supplying mass-produced branded clothing products. The benefit to consumers is a brand that is maintained by very costly marketing efforts, though the product that is produced is low-cost. Margins in this industry can be very high, so when a brand is successful it can be very valuable.
Unfortunately, many sports apparel companies are trading at very high valuations. This is a pity, because their business model is so attractive. Investors should exercise discipline and wait for lower valuations, or find other ways to invest in the sports apparel ecosystem.
Flagrant Valuation Fouls
Lululemon Athletica (NASDAQ: LULU) is a sports apparel stock that has profited from the rising popularity of yoga. This stock trades near $74, a price level that is too much of a stretch, even for a yoga master. Investors can buy more revenues per dollar from the S&P 500, since this index has a price-to-sales ratio of 1.29 while Lululemon has a much higher 7.01 ratio. Lululemon shares are trading at a lofty 49.38 price-to-earnings ratio, a price multiple which is more than three times the 14.1 PE ratio of the S&P 500.
Under Armour (NYSE: UA), at $56 per share (a 54.6% jump in price over the past year), is too expensive. This price level is too lofty for the firm’s fundamentals, especially when you consider that investors can buy more revenues per dollar from the S&P500’s price-to-sales ratio of 1.29, compared to Under Armour’s much higher ratio of 3.57. Also, Under Armour is trading at an indefensibly high 59.04 price-to-earnings ratio.
V.F. (NYSE: VFC) may be a better company than Under Armour, but it’s still too expensive at a price of roughly $159 per share. The firm's 1.68 price-to-sales ratio is in line with today's prevailing market multiples. VFC shares currently trade at a high 19.16 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. The only upshot for investors is the stock’s 1.82% dividend yield. Future dividend payments are likely because the company pays out 33% of earnings as dividends, so earnings could drop considerably before dividends must be cut.
Nike (NYSE: NKE) is in the same boat, since it is a bit richly valued at a price of roughly $96 per share. The firm's 1.75 price-to-sales ratio is a touch higher than today's prevailing market multiples. Nike shares currently trade at a high 20.77 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index. The shareholders of this large cap stock have not seen much movement in the stock price over the past year. Fortunately, they have collected a 1.51% dividend yield from the stock while they wait. Future dividend payments are likely because the company pays out 31% of earnings as dividends.
Fortunately, investors can buy reasonably-priced Adidas AG (ADDYY) for $42 per share. Adidas trades at more reasonable valuation than its competitors: shares currently trade at a high 17.61 price-to-earnings ratio and a 0.95 price-to-sales ratio, which is lower than the price-to-sales ratio of the S&P 500. This stock is the only attractively-priced stock on this list. Potential investors should not buy this stock for short-term gains because this stock is traded over-the-counter at low volumes.
Investors should wait until valuations deflate for most sports apparel companies. Instead, they should participate in the growth of sports marketing through direct investment in small private ventures or by purchasing shares of Adidas for the long-term.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.