A Footwear Play For Safety And Growth
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nike (NYSE: NKE) is the world leader in athletic footwear, athletic apparel, and accessories. In fact, Nike is so dominant when it comes to footwear that industry analysts estimate that the company has a 50% market share, meaning they sell as many athletic shoes as all of their competitors combined. Nike has performed very well over the past decade or so, more than doubling their revenue and tripling the share price. My question is whether Nike is still a growing company worthy of new investment, or if one of its up-and-coming competitors, such as Under Armour (NYSE: UA) is the way to go.
As far as footwear goes, I believe Nike is about as big as it is going to be. Where there is significant opportunity for growth is in apparel, which is a much larger market than footwear, estimated at around $100 billion annually. Nike also plans to double its direct-to-consumer business within five years, significantly grow its developing market business, and to grow its affiliated brands, such as Cole Haan, Converse, and Umbro.
In both the footwear and athletic apparel sectors, consumers tend to gravitate towards the latest in trends and technology. For this reason, Nike stresses R&D and is not stingy with its advertising spending, which it sees as a way to create or develop trends. For example, last year Nike spent $2.4 billion on advertising and promotions alone.
When researching Nike, what was most surprising to me was the pricey valuation attached to Nike shares. Nike trades at 24.7 times TTM earnings and 20.9 times forward earnings. Consensus estimates call for a forward growth rate of around 12.8%, which is substantial, but a little low for a company trading at such a premium. This seems mildly overpriced, so let’s take a look at alternative ways to play the sector.
When it comes to athletic apparel and footwear, the logical alternative is another large manufacturer such as Under Armour. You could also possibly play it by investing in a company that sells Nike’s products, such as Dick’s Sporting Goods (NYSE: DKS).
Under Armour, which is one of my personal favorites, trades at 31.9 times forward earnings, however is expected to grow at a 25% rate going forward. You can read my full thesis on Under Armour here, however my general philosophy is that there is so much room to grow. Under Armour has one of the best reputations for quality, even more than Nike in my opinion, and they have barely penetrated the $12 billion “active use” apparel market, having just introduced cotton apparel to its product lines less than two years ago.
In terms of their respective products, it is like comparing Apple and Hewlett-Packard laptops. You can probably get a similarly equipped model from HP for half of the price; however the quality of Apple’s laptops is simply unmatched. Such is the case here with Under Armour’s products.
When it comes to the retail side of footwear and athletic apparel, I don’t have quite as favorable of an opinion. While I love Dick’s Sporting Goods as a company (I’m in the stores at least every other week), I think it is simply too expensive to warrant an investment right now. A P/E ratio of 23.6 is very high in the retail sector in general, and I don’t think their forward growth projections of 14% annually are realistic. I don’t think they will be able to expand their number of stores as rapidly and as cost-effectively as they seem to think they will.
When it comes to investing in athletic apparel, the way to go is definitely with the manufacturers. The question is whether you want a stable, giant company that has limited room to grow in its sector, or do you want an up-and-comer that could potentially deliver monster returns over the long run, but could just as easily lose value if their growth ambitions don’t quite pan out.
My opinion is that Nike probably offers the better risk-reward of the two, and the fact that it is a dividend payer with a good history of raises doesn’t hurt its viability in a long-term portfolio. Personally, I’m a bit more of a risk taker, but you can’t go wrong with the biggest and most successful athletic shoe maker in history.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends 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!