Image source: Nike.
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People in the U.S. and around the world have become more health-conscious in recent years, and companies that make the products that help people be more active have done extremely well. Nike (NYSE: NKE) was a pioneer in the athletic apparel business, with more than half a century of history behind its world-renowned brand. Yet a greater amount of competition has popped up recently, and among the up-and-comers, Under Armour (NYSE: UA) stands out as the most successful in challenging Nike's dominance.
Investors looking at the space for the first time want to know which stock could be the better bet right now. Let's look more closely at Nike and Under Armour, comparing them on a number of metrics to see which one looks more attractive right now.
Stock performance and valuation
Nike and Under Armour have produced strong long-term performance for shareholders, but recently, both stocks have been weak. Nike has fallen 2% over the past 12 months, but that's far better than the 22% drop Under Armour has suffered since September 2015.
From a valuation perspective, it's easy to see the different ways in which market participants perceive Under Armour and Nike. When you look at trailing earnings, Nike's status as a more mature player in the industry stands out. The stock trades at 26 times earnings, which reflects the past growth in the overall industry and Nike's success in capturing it. Yet Under Armour trades much more like a high-growth stock, with a trailing earnings multiple approaching 100.
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That said, the differences in near-term growth rates show up just by looking at predicted earnings in the immediate future. Nike sports a forward earnings multiple of 20, which is a sizable reduction from its trailing price-to-earnings ratio. Yet Under Armour comes all the way down to below 50 with its forward earnings multiple. Nike is still much more of a value play for the space, but as we'll see below, Under Armour's growth prospects have led many to believe that the company has the potential to justify a higher valuation.
Dividend investors typically look to the more mature companies in an industry for potential income, and that practice holds true in athletic footwear and apparel. Nike pays a dividend, while Under Armour doesn't, so the only choice for those looking for immediate income is Nike.
Yet even Nike isn't all that dedicated to shareholders when it comes to its dividends. The stock's current yield is just 1.1%, and past increases to its quarterly payout have been relatively modest compared to its earnings growth. Nike has doubled its quarterly dividend since 2011, but even it has to invest sizable amounts toward promoting its brand and developing new growth opportunities. Nike is the better pick for those needing portfolio income, but dividends aren't a huge priority for the older company as long as internal investments can pay off.
Growth and fundamentals
Nike and Under Armour have both done a good job of capitalizing on the potential of the athletic apparel industry, but they've also had to deal with the challenges that come with lightning-fast growth. Nike recently posted results for its fiscal fourth quarter, and the company kept its top line moving in the right direction, rising 6% for the quarter and for the full 2016 fiscal year. Yet even though Nike managed to boost its net income for the year by 15% compared to 2015, its fourth-quarter results weren't as strong, with the bottom line actually falling 2% from year-earlier levels. Although currency impacts put some downward pressure on Nike, overall sales in its key North American market were flat, which stands in stark contrast to gains in the 20% range for Western Europe, China, and Japan. International growth remains the biggest driver of expansion for Nike, but some are worried about sluggishness closer to home as a potential signal for a longer-term slowdown.
Interestingly, Under Armour saw some of the same trends, although its growth trajectory is somewhat higher. In its most recent quarter, the company posted a 28% rise in revenue, but net income slid by more than half. From a sales standpoint, Under Armour has done a good job in several growth categories, including a nearly 60% jump in footwear sales and a gain of more than two-thirds in its international revenue. Increases in overhead expenses held back bottom-line growth, but one big concern for Under Armour comes from the bankruptcy of longtime distribution partner Sports Authority. Under Armour is making big moves to compensate, including building a relationship with retailer Kohl's and its plans to enter the sportswear business. Near-term reductions in guidance made some shareholders unhappy, but Under Armour remains focused on the long haul and expects worldwide growth to help it keep climbing.
Based on all of these factors, Nike and Under Armour both look promising. For high-growth investors who have confidence in the prospects for this business to grow over time, Under Armour provides a longer runway for share-price gains. More conservative investors would likely be more comfortable with Nike and its blue-chip megacap status. Either way, a rising industry should lift all boats, and both Nike and Under Armour could deliver good returns well into the future.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike and Under Armour (A Shares). 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.