Nike or Under Armour? Consider Earnings Visibility
Headed into earnings after the close Thursday, Wall Street was clearly concerned about underlying fundamentals at Nike (NYSE: NKE).
While growth in North America continues to hum along, worries about slowing growth in China have weighed on the stock. Those concerns were validated after the close Thursday when Nike reported fiscal first-quarter results. The footwear and apparel company said future orders in China fell 6%. A year ago, future orders in China rose 27%.
Overall, though, the numbers weren't too bad. Fiscal first-quarter profit fell 9% from a year ago to $1.27 a share, nicely above the Thomson Reuters consensus estimate of $1.12. Sales growth decelerated for the third straight quarter but still rose 10% to $6.67 billion. Analysts expected $6.43 billion.
North America was a bright spot as sales rose 23% to $2.7 billion. In Europe, revenue fell 5% to $1.17 billion. Sales in emerging markets rose 8% to $867 million while sales in China increased 8% to $572 million.
Gross margin fell 80 basis points to 43.5%, mostly hurt by rising input costs.
Nike's price performance in recent months has been less than stellar. The stock is basically flat year-to-date compared to a 15% gain for the S&P 500. It's clearly a damaged stock from a technical perspective, under institutional selling pressure for some time now. Currently, it's trading below its 40-week simple moving average ($101.52) -- a potentially significant resistance level at this point.
Investors sold the stock in pre-market trading. Shares traded around $93.20, down 2.9% from Thursday's close.
Nike's current valuation of 20 times trailing earnings and 16 time forward earnings isn't unreasonable. Nike bulls will say that most of the bad news is already price in here. The bears will say that more P-E contraction could be in store. Recent price and volume trends say the potential for more downside outweighs the potential for upside in the near-term.
Meanwhile, earnings visibility at athletic apparel maker Under Armour (NYSE: UA) looks a lot better. It's a pricey stock, currently selling at 58 times trailing earnings and 36 times trailing earnings, but traders shouldn't automatically dismiss a stock just because of a lofty valuation. Sometimes, it's warranted -- especially if there's a good growth story, and growth prospects still look solid at Under Armour.
It's expected to earn $1.19 a share this year, up 28% from 2011. Next year, analysts expected profit of $1.54, up 29%.
Under Armour continued to make inroads in its footwear category. It introduced a running shoe earlier this year called the UA Spine, and its football and baseball cleat business continues to perform well. Second-quarter footwear sales rose 44% to $67 million.
The stock has made a big price run already, but it could have more left, especially if new money continues to come in from the sidelines between now and the end of the year. Fast-growing names like Under Armour still in the early stages of growth can be more compelling investments than mature companies like Nike.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.