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Here’s Another Reason to Buy Nike Stock and Sell Under Armour Stock

In the athletic apparel world, it has been tale of two cities for Nike (NYSE:NKE) and Under Armour (NYSE:UAA) over the past two years. During that stretch, Nike’s operating profits have risen 3%, revenues have risen 12%, and Nike stock has risen 50%. Meanwhile, Under Armour’s operating profits have dropped 70%, revenues have risen just 5%, and Under Armour stock has fallen 30%.

This tale of two cities will persist over the next several years.

Nike Stock
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Source: Shutterstock

Multiple data-points indicate that it will continue to be the best of times for Nike stock and the worst of times for Under Armour stock. Most recently, Nike won a 10-year MLB uniform partnership that Under Armour supposedly won back in 2016, but then had to back out of because of financial troubles in 2017-18.

Now, Nike’s swoosh will be front and center on all MLB jerseys, much like it is front and center on all NBA and NFL jerseys, and on plenty of top European soccer jerseys, too.

This development is just a microcosm of what is happening across the entire athletic apparel industry. For a few years in the mid-2010’s, Nike got complacent. Competitors like Under Armour and Adidas (OTCMKTS:ADDYY) took advantage of Nike’s complacency. They rapidly gained market share. Then, the sleeping giant woke up, and Nike has been on an aggressive tear ever since.

Net result? Nike is back to growing again in every geography, and is taking back market share at a rapid rate.

Renewed Nike dominance is here to stay for the foreseeable future. As such, at this point in time, the best thing to do in the athletic retail space is buy Nike stock and sell Under Armour stock.

MLB Partnership and NKE Stock

Back in 2016, when Under Armour was a hyper-growth company growing rapidly in every geography and across every product category, the company made headlines when it a signed a deal to replace Nike and Majestic as the on-field uniform supplier for the MLB.

That deal never came to fruition. Instead, Under Armour’s growth narrative came off the rails. As it did, the cost of the 2016 MLB deal became unfeasible. Under Armour had to back out. Nike stepped in. Now, Nike will be the exclusive on-field uniform supplier for the MLB starting in 2020, and will hold that title until at least 2030.

That means that, by 2020, the Nike swoosh will be front and center on all MLB uniforms, and will remain there until 2030. It’s already front and center on all NBA jerseys, and all NFL jerseys, too. Those deals are in place until 2026 and 2028, respectively.  

Thus, for the next roughly ten years, the Nike swoosh will be everywhere that consumers are watching professional sports globally. If there is anything that is true about sports, it is that that trends start with the pros. If LeBron’s doing it or wearing it, all basketball players in the world want to do or wear it, too.

All the pros will be wearing Nike gear for the next 10 years when most consumers see them on TV – jersey tops, jersey shorts, warm-ups, so and so forth. Thus, being the official on-field uniform supplier for every major professional sports league in the world over the next several years ensures increasing brand awareness and relevance for Nike.

That’s a favorable position for financials. Revenues and profits will rise as a consequence of this rising relevance. That will power the stock higher, too, most likely at the expense of other athletic apparel stocks like Under Armour.

Valuation Makes Sense for Nike

It’s easy to look at the valuation for Nike stock (31X forward earnings), see that it’s above the five year average valuation (25X forward earnings), and write off Nike stock as overvalued.

But that analysis oversimplifies the current landscape for Nike.

As stated before, what you have is a sleeping giant that has not only woken up, but is also more energized and aggressive than it has been in recent memory. That will inevitably lead to above-average growth rates.

Over the past two years, revenues rose by 12% and operating profits rose by 3%. Over the next two years, revenues are expected to rise by over 16%, while EPS is expected to grow by more than 30%. That’s a stark difference. You are talking about a company that’s going from muted profit growth, to ~15% annualized profit growth.

That huge pivot in growth requires an equally huge pivot in valuation. Over the past two years, Nike stock has traded around 25 forward earnings. Thus, today’s 30 forward multiple seems more than reasonable.

After all, if you throw an average 25 forward multiple on 2021 EPS estimates of $3.60, you get a 2020 price target of $90. Discounted back by 9% (taking 1% off my normal 10% discount rate to account for the 1% dividend yield), that equates to a 2019 price target of over $82.

Nike stock trades under $80 today. Thus, the stock is reasonably valued against the backdrop of a strengthening growth narrative. That combination almost always leads to healthy gains.

Bottom Line on Nike Stock

Nike is back to dominating the global athletic apparel scene across every sport and every geography. This dominance will persist for the foreseeable future, likely at the expense of major competitors. As such, buying Nike stock and forgetting stocks like Under Armour is the smart move at this point in time.

As of this writing, Luke Lango was long NKE. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/another-reason-to-buy-nike-stock-simg/.

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