Better Buy: Under Armour Inc. vs. Skechers USA Inc.

Five years ago, if anyone had suggested that Skechers (SKX 1.12%) was a better stock to buy than Under Armour (UAA 1.48%) (UA 0.82%), they would have been laughed out of the room. Skechers was settling an embarrassing lawsuit over its Shape-up shoes, while Under Armour was in the middle of an impressive run of quarters with comps growth of over 20%.

But that was then, and this is now. Under attack from all sides, and dealing with some poor inventory decisions, Under Armour is operating in a very different climate. And that has led the two companies to very different results.

On a split-adjusted basis, Under Armour stock sits around 66% higher today than it did five years ago, though its shares have declined nearly 60% from their 2015 highs. Skechers, on the other hand -- despite its own sharp rise and sharper tumble in 2015 -- has returned almost 300% over the past five years.

Image source: Getty Images

Does that mean that we should abandon Under Armour, or that it's stock is actually a great deal right now? Relative to an investment in Skechers, there's no way to know for sure. But there are three different lenses through which we can evaluate each company. Here's how they stack up.

Sustainable competitive advantages

Evaluating a company's sustainable competitive advantage -- or "moat" -- is the most important thing any long-term investor can do when considering a stock. While the financial statements and valuation are important (more on those below), it is the moat that keeps customers coming back year after year, while holding the competition at bay.

For both of these companies, brand is the most important moat. Competitors already make similar footwear and apparel, and the barriers to entry for new rivals aren't unreasonable, so a strong brand is one of the few things preventing their products from quickly becoming commoditized.

Under Armour got its start by being the first national company to popularize wicking technology in athletic wear. It rode that success a long way and became one of the premier brands in America. While that momentum might have died down a bit, the brand is still very strong: Forbes recently ranked it as the fourth-most-valuable brand in sports, worth roughly $5.5 billion.

Skechers, on the other hand, also has a strong brand. In fact, Brand Finance said that Skechers  was one of the fastest growing brands in America over the past few years. That growth, however, hasn't allowed it to eclipse Under Armour... yet. The brand was valued at $2.6 billion.

Winner = Under Armour

Financial Fortitude

Investors normally like to see companies do two things with their excess cash: plow it back into growth opportunities, or send to shareholders via dividends or share buybacks. Just letting a pile of money sit in the bank isn't very sexy.

But there's something to be said for keeping a cash hoard in reserve. That's because every company eventually experiences difficult economic times. Those that enter such a period with lots of cash and little debt often emerge from them stronger: When your sector is getting punished, you can use your stockpile to buy back shares, acquire rivals on the cheap, or outspend the competition to gain long-term market share.

If on the other hand, a company is cash poor and debt heavy, it's fragile -- even minor issues can leave it staring down the prospect of bankruptcy. Keeping in mind that Under Armour's market cap is almost twice the size of Skechers', here's how the two stack up.

Data source: SEC filings, Yahoo! Finance, Unilever IR. Net income and free cash flow presented on trailing twelve-month basis.

Without a doubt, Under Armour is far more financially vulnerable. It has a massive debt load relative to its cash, especially when compared to Skechers, and is bringing in less profit and free cash flow.

If an economic crisis hit now, it could prove to be a fatal blow for Under Armour.

Winner = Skechers

Valuation

Finally, we have the murky science of valuation. While there's no single metric that can tell you definitively if a stock is cheap or expensive, there are a number of ratios investors commonly consult. Here are three that I like to use.

Data source: Yahoo! Finance, E*Trade. P/E calculated using non-GAAP earnings when possible. N/A = Not Applicable

Once again, we have a clear winner: Despite Under Armour's steep stock decline over the past two years, it remains very expensive by all three of these metrics. In fact, even after factoring in forecast growth (PEG Ratio), it appears to be trading for a more than 400% premium to Skechers.

Winner = Skechers

My winner is...

So there you have it: Skechers -- which was surprisingly the better buy five years ago -- remains the better buy today. While Under Armour has the wider moat -- based on the strength of its brand -- Skechers is closing the gap fast. And when it comes to financial fortitude and valuation, Skechers clearly offers investors a more favorable chance for profit.