A Mixed Bag For Nike- Still Better Than This Stock

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

With retailers seeing high volumes from the holiday sales, investors should consider backing quality brand name consumer stocks. The variables to look for include free cash flow trajectory, competitive position, and growth catalysts. With this in mind, I review 2 key stocks below.

Nike (NYSE: NKE): A Mixed Bag

Over the past 6 months, Nike has lost 10% in value--much of the sell-off resulting from a 14.6% miss in 2Q12. Despite a 13.4% beat in 2012, the stock has obviously not recovered. It now trades at a respective 21x and 16.2x past with a forecast for 10.3% annual EPS growth over the next half decade. FCF has been up and down and is now recovering from a local low at the beginning of 2012. Return on invested capital is at least 20.9%, so the business is also creating value.

I also like the company's strategy of becoming more generous with its capital allocation policy. It recently announced a stock split and a 16.7% dividend hike, which caused the stock to jump 1.3% in after hour trading. In addition, the firm is geared to sell its Cole Haan brand for $570 million by early 2013--slightly above analyst expectations. Earlier last month, the firm announced its sale of Umbro brand for $225 million, which will be transacted by the end of this year if all goes as planned. In addition, the company is capitalizing off of strong sport trends. Growing popularity of the NBA in China has caused Nike to seek player endorsements to the emerging market.

Furthermore, I believe that the Street is too pessimistic on consumer economics. Yes, the fiscal cliff and Hurricane Sandy are effecting sales, but these are isolated events. Consumer confidence has risen to its highest level in 5 years, and holiday sales--although slowing to its lowest pace since 2009--are expected to grow 4.1%, 60 bps above the average growth realized from 2001-2011. Moreover, online sales are expected to grow 12% to $96 billion, or 14.1% of sales. With that said, in the trailing twelve months ending 3Q12, Nike generated $1.8 billion in FCF, or a yield of just 4.1%. So, as good as the underlying fundamentals and capital allocation policy are, multiples and limited free cash flow yield make the stock a "hold".

Under Armour (NYSE: UA): A Good, But Overvalued, Brand

Compared to Nike, Under Armour is a loser stock. It trades at a respective 50.7x and 35.2x past and forward earnings--an astronomical amount for a challenging industry. Analysts still expect the company to grow EPS by 22.5% annually over the next 5 years. Assuming expectations are met, 2016 EPS will be $2.76. At a multiple of even 20x, this translates to a future stock value of $55.20--right around where the stock is currently being valued at. In present terms, it should be worth $34.27 (that number inputs a 10% discount rate.)

There are plenty of catalysts that investors should be excited about. Under Armour will open a speciality store in Baltimore in 2013--the first of its kind. It is aiming to expand across the mid-Atlantic region to take out big box retailers. By doing exactly what Crocs (NASDAQ: CROX) and Deckers did not do, Under Armour has been able to succeed. Specifically, I am complementing the company's diversification strategy. Sterne Agree recently released a bullish opinion on the company specifically highlighting Under Armour's ability to leverage its brand into new categories. Strategies like targeting women with increased marketing efforts only add to this strength, which will enable the company to further expand margins.

But, ironically, Crocs may have greater upside than Under Armour has. Crocs had one solid product that was more or less a fad. Yet it has plummeted around 82% from its peak and now trades at only 8x past earnings with double-digit growth prospects. Moreover, the company generates a free cash flow yield of 11% and has a clean, cash-rich balance sheet, as evidenced by the absence of debt and 3.4x current ratio. The PEG ratio stands at 0.81x. All of these multiples are substantially below those of Under Armour. If the company weren't generating higher and higher free cash flow, I would argue that it trades at a discount because of poor momentum. However, that is not the case, so I believe a market correction could be in the work.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend 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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