UA vs NKE

The Kentucky Derby is coming up in less than three weeks. Some of those betting on the race will be focused on the horses: which horse is the fastest, which horse has the most stamina, which horse has the best jockey and trainer. A few bettors will not be focused on the horses, they will be focused on the odds. They will be looking for a situation where the probability of a horse winning is a mismatch with bettor expectations of it winning.


In 1997 Nike was a fast horse with great stamina. In the five years since 1992 Nike had grown revenues and earnings over 20% per year. The price had responded growing 30-40%. If you had the foresight to buy Nike in 1997 for the median price of $12 (adjusted for splits and dividends) it would be worth more than 8 times that today – an annualized return of 12.5%. Nike’s price earnings ration (P/E) was about 22 at the time.

In 2015 Under Armour looks like another fast horse with great stamina. It has been growing revenues and earnings at 30% or more the last five years. It has a P/E of 88.

Instead of a 22 P/E in 1997 if Nike’s P/E had been 88 back then, you would not have made 8 times your money, you would have made 2 times your money in 18 years – a return of 4% annualized.

In 1998 a crisis hit Asia and spending slowed in the US. Nike was forced to layoff over 1,000 workers. Nike’s price dropped and essentially stayed flat for the next five years.


The probability of a horse jumping an eight foot fence is very low, and if everyone is expecting the horse to jump that fence then the odds are very poor. Low probability joined with poor odds are a recipe for a disappointing return.

Recognize the difference between picking horses and making wagers in which you have an edge. The only path to consistent profit is to exploit the discrepancy between the true likelihood of an outcome and the odds being offered. - Steven Crist

Thanks,
Ears

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I have held NKE for many years, have been trimming in recent years.

I like UA very much as a company, would like to buy some shares at 25-30% of the current stock price.

sw

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would like to buy some shares at 25-30% of the current stock price.

I suspect that would be true of many companies! :slight_smile:

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Hi Ears,

I totally get what you are saying (I think…) but…

Look at what’s happened since I bought shares in December 2013…

They’ve gone up!

and UP!

and up!!

A 57% increase in a little over a year.

Are you suggesting that I sell now?

I am feeling inclined to keep riding the train. UA, along with FB are the most expensive stocks in my port. (Oh wait, it looks like UA’s PE is 90 now…) I have some stocks that are “salad” and some stocks that are “steak”… But maybe the FB and UA are a little bit of chocolate???

I don’t know but I like seeing this one go up!

Karen

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P.S. I really like the horse analogy. I’m going to go look in my barn now at the companies in the stable.

Karen

Ears - I am not sure I follow you math. At 12.5% annually, it’s roughly 210% rise over 17 years. If it’s 8x, that implies almost 50% return annually.

Sox Nation

I am not sure I follow you math. At 12.5% annually, it’s roughly 210% rise over 17 years. If it’s 8x, that implies almost 50% return annually.

Sox Nation, what are we both doing here, it’s opening day!

Nike’s median price in 1997 was $11.99 (split and dividend adjusted).

Nike’s price yesterday was $99.97.

99.97/11.99 = 8.3x

Time span is roughly 18 years – mid 1997 to almost mid 2015.

Beginning Value = 11.99, Ending Value = 99.97, Years = 18

results in 12.5% annualized (compound annual growth rate)

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But there are some companies where I am a happy owner at the current price, that would not be true for UA. UA is a “greater fool theory” stock, so far that has been working, probably won’t work forever.

sw

1 Like

I totally get what you are saying (I think…) but…

Look at what’s happened since I bought shares in December 2013…

They’ve gone up!

and UP!

and up!!

A 57% increase in a little over a year.

Are you suggesting that I sell now?

I am feeling inclined to keep riding the train. UA, along with FB are the most expensive stocks in my port. (Oh wait, it looks like UA’s PE is 90 now…) I have some stocks that are “salad” and some stocks that are “steak”… But maybe the FB and UA are a little bit of chocolate???

I don’t know but I like seeing this one go up!

Karen,

I’m not sure you understand what Ears is saying. Just because a stock had gone up isn’t on its own a good reason to hold on. Here’s what I wrote about UA last Summer before I started selling my shares:

http://discussion.fool.com/i-know-nothing-of-pe-ratios-as-good-a…

As good as a product might be, value should always be considered. Is there ANY price of UA (the stock) that is considered too expensive?

Someone recently mentioned that they could see UA becoming the next Nike. Ok, let’s assume that UA will become the next Nike. Nike’s sales are about 10x that of UA. Let’s assume that UA continues on a growth rate that it’s been on for the past few years. That’s around sales growth of 28%. So at that rate it will reach Nike’s size in about 10 years. But that also means that UA should then have a stock price multiple that’s similar to Nike’s today. Nike reports GAAP earnings so for simplicity let’s just use P/S. Nike had sales of $27.8B and 905M shares outstanding which is $30.7 in sales per share. UA should have 131M shares if it continues to dilute at 2% per year. That would be UA a share price of $212 in 10 years. At today’s price of around $70. That would be a 202% gain over a 10 year period. The equates to about an 11.6% annualized return. Personally, I’d like to find higher yielding investments.

Also, keep in mind that UA shares were trading at about $70 back then. Now the shares are at $85 so if they become the next Nike (i.e. get as large as Nike and end up with a similar P/E at the end of it all) then you’re looking at about 150% return in 10 years over today’s price. That’s a little less than 10% annualized if they execute for the next 10 years and become as big as Nike.

Chris

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Hear, hear, Ears!

I completely agree with you and have written multiple….unheeded…. posts over time that… eventually…. a mature company is going to have a PE somewhere in the teens. If you buy a company at 3, 4 or 5 times that PE…. the company is going to have to grow by 3, 4 or 5 times in the future just to pay down that PE. And to actually make money for you as an investor, it has to do much better than that.

Yes. It DOES matter what you pay for a company.

Sure. Maybe you’ve found one that will grow to 100x it’s current value. It happens. But don’t make an investing career on betting (yes, betting) that you have a 100:1 shot in your portfolio. Or a fistful of 100:1 shots in your portfolio.

I much prefer to buy that 100:1 or 20:1 company when it’s undervalued relative to it’s earnings growth and potential. Think it doesn’t happen? Then you’re not paying attention and just following the herd. Nice to see the conversations on this board digging up those true gems.

Rob

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Fast growers always seem expensive because people have a hard time thinking in terms of compounding. There is the famous story of the guy who invented chess.

There’s a famous legend about the origin of chess that goes like this. When the inventor of the game showed it to the emperor of India, the emperor was so impressed by the new game, that he said to the man

“Name your reward!”
The man responded,

“Oh emperor, my wishes are simple. I only wish for this. Give me one grain of rice for the first square of the chessboard, two grains for the next square, four for the next, eight for the next and so on for all 64 squares, with each square having double the number of grains as the square before.”

http://www.dr-mikes-math-games-for-kids.com/rice-and-chessbo…

No wonder Einstein considered it the most powerful force in the universe.

That’s not so say there is no risk involved. But to call them expensive is a mistake. Fast growth cannot go on for ever. The important thing is to figure out where in the growth cycle the stock is. Growth has a natural patterns, the “S” curve. When you buy a fast grower make sure you don’t overstay your welcome.

https://www.google.com/search?client=safari&rls=en&q…

Denny Schlesinger

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This one is another gem of a post. Awesome!

Someone has explained nicely why I don’t own either NKE or UA :wink:

Anirban

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http://invest.kleinnet.com/bmw1/stats25/NKE.html

Expensive Nike has made money for just about everybody, specially for those who bought wisely. I’d say an average of 15% is market beating, the S&P 500 made just 6.5%

http://invest.kleinnet.com/bmw1/stats25/^GSPC.html

This is the story of the hare beating the tortoise! LOL

Denny Schlesinger

Someone has explained nicely why I don’t own either NKE or UA :wink:

Me neither!

:wink:

Saul

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Been thinking about selling UA for a while, thanks for getting me to press the sell button.

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Like ethan, I closed out my small position in UA today as well. I love the company, the products, and the growth. I don’t mind owning overvalued companies, as long as they are not in nosebleed territory. I’m sure there is still money to be made with a long UA position, but for me it is outside my risk tolerance.

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Jordan Speith’s victory will indeed cause many a YOUNG person to purchase what he wears.

My wife and I know sons…we have 5. When Speith was playing in the blue horizontal pin stripe shirt, our 25 year old son remarked how sharp the shirt looked. Tonight my wife asked me to purchase the shirt online for him…which took me all of 2 minutes to find the exact same shirt (some coincidence, huh) that he was wearing THE DAY he played in it. That is sharp marketing.

But folks, the primary buyers of these products is the same crowd who bought Jordan Airs from Nike…young people. They just want to look like their hero on TV.

Go into your local Sports Academy and you will notice that the largest section by far is UA apparel and it is front and center. The colors are brilliant and catch your eye. The much smaller NIKE and ADIDAS sections were off to side and their clothing looked dingy and unappealing by comparison.

Just saying UA has the sharpest marketing and design apparel today. And the young folks are choosing UA in much larger quantities than other brands.

I know UA is an expensive stock. However, the continued explosive growth from young people has a very long runway, IMHO.

Jim

12 Likes

Jim,
shhhhhh…i just sold my position. Don’t make me feel bad about it.

(i’m kidding of course, I really appreciate the various opinions)

-e

I agree that the p/e is in frothy territory and the investment in the company bears watching. Couple of comments. Comparing tech to retail, I think the threat of disruption is less in retail so there ought to be a bit more warning of problems. UA is easier to understand than UBNT, for example (IMO).
Secondly, with these growth companies one needs to pay attention to the second derivative. Are the revenues, EBIT, net income accelerating? In the case of UA, the data are mixed. Revenue is accelerating. The 2nd AND 3rd derivatives are increasing. Net revenue is decelerating over three years, EBIT is accelerating over 3 years.
Since I am not 100% fast growth invested, there is still a place for UA in my portfolio but if rate of growth decelerates, that is the warning signal I would look to. Particularly revenue.

KC

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Secondly, with these growth companies one needs to pay attention to the second derivative.

What are “2nd AND 3rd derivatives?”

Thanks,

Denny Schlesinger