You Can Run Far With This Stock
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s not often that a chart will be used in an introduction, but in this case, it’s important. Below are three-year performances for Nike (NYSE: NKE), Under Armour (NYSE: UA), and Lululemon Athletica (NASDAQ: LULU). When you look at this chart, you might ask yourself why you would consider investing in Nike over Under Armour and Lululemon, but it’s important to keep in mind that investing should always be forward-looking.
If you want a growth/momentum play, then you might be interested in Under Armour or Lululemon over Nike, but if you’re looking for steady long-term growth, then Nike is the place to be.
Nike is, by far, the strongest brand of the three, and the brand is growing on a global scale. Try to imagine a time when Nike was an up-and-coming name in the United States. A lot of consumers jumped on the bandwagon and bought Nike products because it was the cool thing to do. Good quality didn’t hurt either.
Well, that trend is taking place once again. Only this time, Nike is improving its brand recognition on a global scale. As incomes continue to increase for consumers in emerging markets, this should bode well for Nike. Future orders have increased in North America, China, and even Europe. Only Japan has seen a decline in future orders.
It should also be noted that Nike commands 20% market share in global athletic footwear. The projected compound annual growth rate through 2018 in this category is 1.8%. That might not be a big number, but any type of growth in the current global economic environment is a positive.
Nike’s management and company culture couldn’t be much stronger. According to Glassdoor.com, a very impressive 91% of employees approve of CEO Mark Parker. This is an extremely high number for such a large company. In most cases, employees are frustrated with a lack of advancement opportunities, but the Nike culture is one that breeds optimism and action, which leads to employees feeling as though they’re playing an important role. This, in turn, leads to increased production. It’s all part of a positive cycle.
Management is also stellar on the innovation front. Recent innovative examples include Free Flyknit sneakers (compression fit with free flexibility), Hyperfeel (designed with natural motion principles to amplify the body's natural ability), and Aeroloft athletic apparel (retains body’s heat while allowing vapor release with perforated down technology).
Yet another positive is management’s ability to manage costs, which improves margins. For example, Nike recently divested Cole Haan and Umbro. Nike won’t hesitate to divest underperforming brands if doing so improves the bottom line. This is a big positive for investors.
Under Armour is also a well-run company. Under Armour CEO Kevin Plank often states that he likes to be the one playing catch up, not the one with the target on his back. His point is that it’s easier to steal market share than it is to keep it.
Under Armour has a loyal following, and top and bottom-line growth have been strong. However, Under Armour is trading at 54 times earnings, making it a lot more expensive than Nike at 23 times earnings.
It’s possible that Under Armour will steal significant market share from Nike in the future, but it’s not as likely as you might think. Nike has close to $6 billion in cash versus Under Armour’s close to $266 million in cash. Based on these numbers, Nike will be able to launch much more powerful marketing campaigns on a global scale, and once it establishes a strong footprint in an overseas market, it will be difficult for Under Armour to gain ground.
Also, if Under Armour makes market share improvements (in any market), Nike has enough cash on hand to acquire smaller companies for inorganic growth.
As far as Lululemon is concerned, growth has been spectacular, but there has been a lot of drama. Lululemon has lived at the center of controversy for years. Most recent examples include a see-through yoga pants recall, suspicious timing of insider selling prior to the announcement of CEO Christine Day’s departure, questions about the real reason Day is stepping down, and class action lawsuits.
On the positive side, Lululemon is all about building a culture. This begins with employees forming personal relationships with customers. As salespeople know, they’re buying you more than the product. Therefore, this is a wise strategy, especially since the company puts an emphasis on health and fitness, which is big deal in today’s world. However, risks outweigh rewards for Lululemon. There are simply too many question marks and risks.
Nike might be the most mature company of the three, but it’s, by far, the safest, and it’s likely to see future growth based on its increasing global brand recognition, organic growth (aided by innovation), and inorganic growth potential. Furthermore, Nike yields 1.30%, whereas neither Under Armour nor Lululemon pay a dividend.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!