Nike Seems Pricey -- Unless Compared to lululemon and Under Armour

You know the Nike (NKE) story: Endorsement deals with Michael Jordan, Tiger Woods, Dwyane Wade and countless other athletes inspired millions to choose Nike as their sports apparel brand of choice. The strategy drove rapid growth for the footwear company. Nike now generates over $20 billion in revenue annually and sports a market cap of nearly $50 Billion.

All of this led to huge gains for investors, outpacing the S&P 500 by a wide margin.

NKE data by YCharts

But Nike isn’t cheap, and its PE ratio is actually higher than it has been in years. Eeek. How to get in on this growth story without overpaying? One way is to compare Nike to current sportswear growth stocks lululemon (LULU) and Under Armour (UA). True, the newer companies’ revenue growth beats Nike’s, but the rate of growth is cooling down for both, and Nike’s of late has been speeding up.

NKE Revenue Growth data by YCharts

Then, look at valuation. Both lululemon and Under Armour have seen their PE ratio surge in the last two years, while Nike’s has but edged up. Do the growth rates justify such a difference in value? And long-term, can lululemon and Under Armour prove as resilient and able to reinvent themselves as Nike has?

NKE PE Ratio data by YCharts

It is hard to find many issues with Nike's business. Revenue has consistently grown in the high single digits to mid-teens, margins are improving and the company is earning over 20% on invested capital.

NKE Revenues TTM data by YCharts

Nike management touts its ability to continue to raise revenue in the high single digits, EPS in the mid teens and to expand capital efficiency. The company is forecasting that revenue will grow to $28 to $30 billion in 2015. At the current 10% profit margin, investors can expect Nike to earn $2.8 to $3 billion in net income in 2015.

In addition, the company continues to use cash to buy back stock and reduce the number of shares outstanding. This is a trend that most investors welcome.

NKE data by YCharts

Management expects margins to continue to expand through cost control, managing the supply chain, exercising pricing power and leveraging direct-to-consumer sales. Nike has a good track record here. They have increased investments in CAPEX and continue to post solid return on invested capital.

NKE Capital Expenditures data by YCharts

Nike's dividend has consistently been raised but sports a yield under 1.5% with the recent gains in the stock.

NKE Dividend data by YCharts

There is little doubt that Nike is running on all cylinders. YChart Pro is "Neutral" on the stock but notes "strong fundamentals". The value score is "average" given the lower earnings yield, book to market of .2 and a relatively low dividend yield of 1.3%. Based on historical multiples, Nike gets attractive after a move that is about 20% lower from current levels. The business is running great but investors might be smart to wait for a pull back in Nike shares before jumping in.

Filed under: Company Analysis