The 2 Biggest Opportunities You May See for a While

Brendan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Two primary options exist for companies that want to grow or fend off competitors. They can move into new markets or acquire other companies. Global brands and products tend to move into new regions of service while technology firms tend to take the acquisition approach.

Rolling out the red carpet

Under Armour (NYSE: UA) held its first investor conference in over two years last Wednesday. What was the big news? As expected, the specialty apparel maker announced its aggressive plan for global expansion. In two years, it may have more international offices than North American offices.

CEO Kevin Plank discussed how the Under Armour team has been “working like crazy” to make the opportunity a reality. The work seems like it will pay off quite well, too. Under Armour forecasts that it will reach over $4 billion in sales—doubling expected 2013 revenue. Perhaps even more impressive, though, is that the company already secured contracts and sponsorship deals with Olympic teams and professional athletes—directly attacking rivals Nike (NYSE: NKE) and Adidas (NASDAQOTH: ADDYY).

Under Armour’s revenues increased 25% in 2012. Only 6% of the growth came from outside the North American market. According to the Wall Street Journal, 59% of Nike’s 2012 sales were outside of North America and 60% of Adidas’ sales were outside its headquarters in Germany. These are indicators that Under Armour can achieve its rosy estimates.

With lower EPS and a higher P/E ratio than its competitors, Under Armour may look overpriced. However, analysts are now expecting higher sales in coming years. Further, its new growth plan and marketing expenses “are expected to weigh heavily on earnings.” First, investors looking for high growth targets should consider Under Armour. Once it is established globally, it may then shift toward paying dividends, like Nike and Adidas. Nike is already at a maturity point. Likewise, Adidas' growth prospects are also extremely low compared to Under Armour's, but it has a higher P/E ratio than Nike. Therefore, of the three, Adidas is the least favorable investment.

 Under ArmourNikeAdidas
P/E ratio 52.19 24.16 31.31
EPS 1.14 2.57 2.6

As Plank said, going global is Under Armour’s “biggest opportunity.” I agree.

If you can’t compete…acquire

International Business Machines (NYSE: IBM) recently announced its plan to purchase SoftLayer Technologies, the largest privately owned cloud-based computing infrastructure firm in the world. The hefty price tag of $2 billion may seem excessive. But, a second glance proves that IBM’s decision could save the entire firm.

Amazon’s (NASDAQ: AMZN) Amazon Web Services currently dominates the cloud computing space along with Microsoft’s Azure cloud platform. IBM’s strategic purchase now enables it to move away from hardware and more costly services into a more sustainable, competitive position. In fact, IBM is restructuring its entire cloud platform around SoftLayer Technology.

Erich Clementi, senior vice-president of IBM Global Technology Services, stated that IBM’s cloud based revenues should grow to about $7 billion in 2015. Three billion dollars of that revenue will be the direct result of the acquisition. However, Mr. Clementi realizes that IBM is still in the early stages of gaining market share from companies like Amazon. In fact, he expects total industry cloud revenues in the ballpark of $250 billion in 2015. A measly 2.8% of total sales may seem small, but it is near priceless considering the massive move toward cloud technologies.

To compete against Amazon, IBM had to acquire SoftLayer Tech. It had no choice. Now, IBM can attract small and medium size businesses that need to store information or rent space.

IBM is in a great position to amend its tactical approach as necessary. For instance, IBM’s excessive free cash flow enables it to pursue opportunities that can further increase shareholder value. While Amazon is consistently strapped for cash, IBM has the freedom to move as needed.

IBM Free Cash Flow data by YCharts

Since taking office early last year, CEO Ginni Rometty pledged to deliver long-term shareholder value and performance. She is doing so. With a P/E ratio of 14.05 and an EPS of $14.50, IBM is well on its way to achieve its target of $20 in EPS by 2015. IBM's EPS is expected to reach $15.53 by this year's end, and acquiring SoftLayer Technology will help the company meet its $20 EPS target.

Takeaway

Both Under Armour and IBM are sailing into uncharted territory. However, they both have a history of executing well and achieving shareholder value. Jumping on board for the ride will prove to be a phenomenal move.

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Brendan Marasco has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Nike, and Under Armour. The Motley Fool owns shares of Amazon.com, International Business Machines., 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!

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