Swoosh, There It Is: Buy Nike, Sell Under Armour

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Last Wednesday, under orders from the Federal Trade Commission, Reebok agreed to shell out $25 million to cover refunds of its RunTone and EasyTone lines. It turns out that getting "better legs and a better butt with every step," as the marketing campaign stated, has more to do with what you actually do when you're wearing the shoes than with the shoes themselves.

This isn't the kind of news you can invest against. Reebok was acquired by German footwear giant adidas (ADDYY.PK) six years ago, and the $13 billion company won't even bat an eye at yesterday's settlement. However, there is an activewear battle that's taking place closer to home.

On Your Marks

At one end of the starting line we have Nike (NKE), the footwear giant that has turned its signature swoosh into a premium brand across several lines of athletic clothing and shoes. At the other end of the line, let's call in Under Armour (UA), the company that got its start with its sweat-shaking shirts but has moved on to cleats and other sporting shoes.

Nike and Under Armour were passing ships in their evolution. Nike started with shoes and worked its way up the body. Under Armour began with performance apparel and worked its way down to the feet.

However, both companies have two of the hottest brands when it comes to athletic apparel.

Obviously, Nike is the larger company, commanding a $40 billion market cap. The much smaller Under Armour is valued at less than $4 billion. In other words, the market is already handicapping the size discrepancy.

I'm going with Nike in this battle, but not just because it's the bigger brand. I like Nike here because of its valuation and its reasonable 1.4% dividend.

Get Set

Under Armour trades at a steep 38 times this year's projected earnings and a still beefy 31 times next year's bottom-line estimate. Nike, on the other hand, can be had for just 18 times this fiscal year's profitability and a mere 15 times next year's target.

Under Armour deserves its premium. The company is earlier in its growth cycle, and it shows: It's growing its revenue by 33% this year and 23% come 2012. Nike, on the other hand, is growing at less than half that rate.

Go, Nike!

However, there's also something to be said about playing it safe in this iffy economy. As much as we should all be out there, living more active lifestyles, not everyone can afford Under Armour's athlete-vetted clothing or Nike's iconic swoosh.

When the economy improves, running with Under Armour will be the better bet. For now, Nike's lower valuation and rewarding yield is the slower track to be on.

I'll stick with Nike.

Longtime Motley Fool contributor Rick Munarriz owns no shares in any of the stocks in this article. The Motley Fool owns shares of adidas and Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour, adidas, and Nike and creating a diagonal call position in Nike.


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