One of the main factors that is causing me to question my valuation of Under Armour is their free cash flow generation. I like to use free cash flow per dollar of sales as a way to compare companies in the same industry. In the last year, Under Armour produced $0.08 of free cash flow per dollar of sales. By comparison, the much larger Nike produced $0.10 of free cash flow, and Lululemon generated $0.05 of free cash flow. Though Under Armour isn’t producing as much free cash flow as Nike, the company’s ability to outperform Lululemon is eye opening. When you consider that Under Armour produced 60% more free cash flow from each dollar of sales versus their closest competitor, this helps explain the high valuation in the stock.
So What Should Investors Buy?
If you don’t want to make a choice, you can benefit from the growth in the industry by purchasing shares of Dick’s. The company pays a 1% yield, and combined with their expected growth of almost 15%, this is a good total industry play. Unfortunately, I just can’t recommend Nike. The shares are far more expensive on a relative basis compared to either Under Armour or Lululemon. The fight between Under Armour and Lululemon is a tougher matchup than it first appears.
Lululemon has the faster growth rate in revenue and earnings, but also carries a slightly higher P/E ratio. Under Armour’s P/E ratio might be enough to scare investors away if they don’t realize how strong the company’s cash flow is. If I had to choose, I might pick Under Armour today. The company’s product lineup is broader based than Lululemon, and their push into women’s apparel should drive positive returns. Investors who want to keep up with this fast growing company should add UA to their Watchlist today.
The article Either A Great Value Or Overvalued, Which Is It? originally appeared on Fool.com and is written by Chad Henage.
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