NIKE, Inc. (NKE), Under Armour Inc (UA), Lululemon Athletica inc. (LULU): Buy What You Know… At the Right Price

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Peter Lynch suggets that market-beating investment ideas will present themselves to investors in everyday life. To continue a series of articles that takes Lynch’s “buy what you know” advice and applies it to real-world examples, this article will illustrate the investing opportunity in athletic apparel.

Growth stories are everywhere

When looking for multi-bagger investment ideas, it can sometimes be as simple as looking at the brands people are wearing at your local gym or on the field of a child’s soccer game. Notice a trend? As many will likely confirm, the dominance of established brands like NIKE, Inc. (NYSE:NKE) and Addidas has steadily been eroded by upstart Under Armour Inc (NYSE:UA). There are a number of reasons for Under Armour’s impressive growth trajectory, but it ultimately comes down to the product itself; initial success in pioneering “performance gear” for men has rapidly expanded into apparel for women and kids as well as footwear.

This is the quintessential opportunity for the individual investor to test drive the product and make their own conclusions regarding the value proposition of the company’s products with more precision than you’ll find from a Wall Street analyst. Are the shirts really better at keeping you cool and dry than the competition? How durable are the shoes? How have interactions with customer service been? These are easy questions for potential investors to ask. Assuming a company like Under Armour Inc (NYSE:UA), Lululemon Athletica inc. (NASDAQ:LULU), or Columbia Sportswear Company (NASDAQ:COLM) pass these qualitative tests, an investor can then start to look deeper to determine whether the company is worth a spot in a portfolio.

How strong is the growth?

After identifying a brand that stands out among its peers, it is time to dig deeper to understand the growth potential of the company. For comparison, here is how Under Armour Inc (NYSE:UA), Lululemon Athletica inc. (NASDAQ:LULU), and Columbia Sportswear Company (NASDAQ:COLM) compare to a behemoth like NIKE, Inc. (NYSE:NKE):

CAPS rating (out of five stars) 5 stars 4 stars 2 stars 3 stars
Market capitalization (in billions) $60.7 $8.0 $10.2 $2.0
Growth rate-past 5 years 8.6% 42.2% 57.4% -0.6%
Growth rate-next 5 years (estimate) 11.5% 20.5% 18.7% 8.2%
Source: Yahoo! Finance-9/16/13

The growth story for Under Armour Inc (NYSE:UA) and Lululemon Athletica inc. (NASDAQ:LULU) jumps out from the table above; while the growth rate is expected to “slow” to around 20% per year going forward for each company, this rate is still almost double the estimated growth of NIKE, Inc. (NYSE:NKE). As you might expect, this tremendous performance has come with an equally tremendous rise in share price over the past five years:

UA Total Return Price Chart

UA Total Return Price data by YCharts

Worried that it is too late to take part in this growth now that Under Armour Inc (NYSE:UA) and Lululemon Athletica inc. (NASDAQ:LULU)’s market capitalizations are hovering near $8 billion and $10 billion, respectively? Under Armour’s visionary CEO Kevin Plank recently explained to investors that he sees Under Armour as a $10 billion brand, which represents a roughly 500% increase from Under Armour’s trailing twelve month revenue of $2.0 billion.

Under Armour expects to get to $10 billion by continuing its relentless expansion geographically, further into women’s apparel, and through expansion of direct-to-consumer sales channels. As a point of comparison, reaching $10 billion in revenue would only equate to about 40% of NIKE, Inc. (NYSE:NKE)’s revenue over the past year.

For Lululemon Athletica inc. (NASDAQ:LULU), the growth potential is just as strong. Experts extrapolate the company’s success in its home country of Canada to represent the potential to increase revenue eight times its $1.5 billion total over the past year.

Both companies have significantly larger growth prospects than Columbia, which is relatively mature with a 75 year history of making apparel and equipment for outdoor activities such as hiking. Sales have declined over the past five years, which is clearly not a good sign for investors looking for growth opportunities.

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