Better Buy: Nike Inc vs. Under Armour Inc

Image source: Getty Images.

Just over a week ago, fellow Fool Joe Tenebruso -- who has an excellent track record with his investments -- wrote an article with the exact same title. In it, he concluded that Under Armour (UAA -1.32%) (UA -1.61%) was a better bet than Nike (NKE -1.26%). Among my family's stock holdings, Under Armour accounts for a small 1.5% of our portfolio, but Nike isn't present at all.

Given these two factors, you'd assume I would argue that Under Armour is the better buy. But as you'll see, that isn't really the case. Using different criteria than Joe did, I went back to evaluate this match-up and came to a different conclusion.

Financial fortitude

Cash sitting in a bank account is pretty boring. Investors tend to like it more when cash is either being reinvested in growth opportunities, or returned to shareholders. But the monotonous practice of just letting it sit actually has a huge advantage.

That's because -- whether we want to admit it or not -- every company will experience times of crisis. It's not a matter of if, but when. And when those times hit, companies with cash have options. They can buy back their own stock, make strategic investments, or outspend their rivals into oblivion.

Debt-heavy companies, on the other hand, are in the exact opposite situation -- forced to do everything possible just to make ends meet and avoid bankruptcy.

Here's how Nike and Under Armour stack up in terms of financial fortitude.

Data source: Yahoo! Finance. Net income and free cash flow presented on trailing-12-month basis.

There's absolutely no question Nike is the stronger company in this respect. Under Armour CEO and founder Kevin Plank has been clear that for now, the company is investing in growth opportunities, ramping up scale, and grabbing market share.

While that could end up being a huge boon for investors, it creates a great deal of fragility for shareholders right now.

Winner = Nike

Sustainable competitive advantages

Evaluating a company's sustainable competitive advantages -- often referred to as a "moat" in investing circles -- is probably the most important exercise an investor can undertake. But it's part art, and part science.

At the most basic level, a company's moat is what makes it special, what makes it different from the competition, and what will continue to make it relevant for decades to come. Under Armour got its start by providing athletic apparel that wicked and was more desirable to use while working out. Obviously, the competition saw how popular this was and quickly started offering the same stuff.

The wicking clothes themselves, then, didn't provide a meaningful moat. But in the interim between when Under Armour began gaining share and when the competition caught on, a real moat did surface -- in the form of a powerful brand that customers came to love.

The tough thing is trying to differentiate between the brand-reliant strength of Nike and Under Armour's moats. At the end of the day, the value of the brand is paramount to both companies, and I would argue that -- on this aspect -- these two are equal.

Winner = Tie

Valuation

Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.

Data source: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.

Here again, we see the effects of Plank's decision to reinvest so aggressively in his company. Because there's no positive free cash flow, there's no metric for comparison. And based on the price-to-earnings ratio, Under Armour is over twice as expensive as Nike -- ouch! Given that Nike offers a dividend as icing on the cake, I have to admit that Nike wins here as well.

Winner = Nike

So, is Nike the better bet?

Here's where we really get to the "motley" part of The Motley Fool. A very strong argument could be made for either one of these companies as a better buy. One aspect I typically leave out of these articles, but that sometimes plays a role in my own investing decisions, is the amount of skin in the game management has. Kevin Plank -- as founder of the company -- has his soul in the game, but he also has a huge financial stake in Under Armour. As of this past March, he owned 16% of shares outstanding and 65% of voting power in the company. Nike's founder, Phil Knight, is now chairman emeritus, and he has a much less involved role.

While I bought my own shares of Under Armour when the company's metrics were more favorable, I'm willing to hold my shares (read: not buy more) in the hope that my faith in Plank will pay off. I am, on the other hand, starting to entertain the idea of buying Nike for the first time. Only time will tell how this one plays out.