Under Armour, Inc. (NYSE:UAA) shares are up more than 63.69% this year and recently decreased -1.58% or -$0.38 to settle at $23.62. Guess’, Inc. (NYSE:GES), on the other hand, is up 30.51% year to date as of 06/13/2018. It currently trades at $22.03 and has returned -2.09% during the past week.
Under Armour, Inc. (NYSE:UAA) and Guess’, Inc. (NYSE:GES) are the two most active stocks in the Textile – Apparel Clothing industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect UAA to grow earnings at a 31.01% annual rate over the next 5 years. Comparatively, GES is expected to grow at a 4.40% annual rate. All else equal, UAA’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 5.5% for Guess’, Inc. (GES). UAA’s ROI is 1.00% while GES has a ROI of 4.10%. The interpretation is that GES’s business generates a higher return on investment than UAA’s.Cash Flow
If there’s one thing investors care more about than earnings, it’s cash flow. UAA’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, GES’s free cash flow per share was -1.31. On a percent-of-sales basis, UAA’s free cash flow was -0.71% while GES converted -4.48% of its revenues into cash flow. This means that, for a given level of sales, UAA is able to generate more free cash flow for investors.Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. UAA has a current ratio of 2.00 compared to 2.50 for GES. This means that GES can more easily cover its most immediate liabilities over the next twelve months. UAA’s debt-to-equity ratio is 0.46 versus a D/E of 0.05 for GES. UAA is therefore the more solvent of the two companies, and has lower financial risk.Valuation
UAA trades at a forward P/E of 75.46, a P/B of 5.19, and a P/S of 1.98, compared to a forward P/E of 17.04, a P/B of 2.05, and a P/S of 0.73 for GES. UAA is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. UAA is currently priced at a 52.58% to its one-year price target of 15.48. Comparatively, GES is -10.99% relative to its price target of 24.75. This suggests that GES is the better investment over the next year.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. UAA has a beta of -0.22 and GES’s beta is 0.29. UAA’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. UAA has a short ratio of 10.62 compared to a short interest of 4.19 for GES. This implies that the market is currently less bearish on the outlook for GES.Summary
Guess’, Inc. (NYSE:GES) beats Under Armour, Inc. (NYSE:UAA) on a total of 10 of the 14 factors compared between the two stocks. GES is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, GES is the cheaper of the two stocks on an earnings, book value and sales basis, GES is more undervalued relative to its price target. Finally, GES has better sentiment signals based on short interest.