VF Corp. and Nike have both had great years in 2013; Ralph Lauren has lagged its peers but still saw impressive growth. These are three competitors that are very similar, but which is the cheapest and is offering investors the best investment opportunity?
Three similar companies
Nike, of course, sells branded shoes and activewear, while Ralph Lauren is a maker of designer clothes. On the other hand, VF operates an assortment of brands, including Timberland and Vans shoes and The North Face, Wrangler, and Nautica clothes.
Therefore, all of these companies compete in one or more industries and trade in the same sector. Yet to determine which is presenting investors with the best opportunity, we must look at future growth estimates and current valuation. Then, whichever company has the best balance will present the greatest amount of upside value.
Two charts to identify value
First, let's look at some valuation metrics for these three companies, and see how they stack up against one another.
Trailing P/E ratio
Forward P/E ratio
Price/operating cash flow
Price/free cash flow
As you can see, the above chart essentially goes left to right in the order of most expensive to cheapest.
In the last few years, Nike has seen the greatest growth, and thus is awarded with a greater multiple versus its peers. So now that we have this information, let's look at expected top-line growth rates for both this full year and 2014.
2013 sales growth
2014 sales growth
2-year growth rate*
*Measures growth from 2012 to expected full-year sales of 2014.
For the most part, the market has correctly valued the three companies in question. Clearly, Nike is head and shoulders above its peers in terms of growth (and valuation). But with VF and Ralph Lauren, there is an apparent disconnect in growth and valuation.
VF vs. Ralph Lauren
First off, Ralph Lauren has better growth than VF but is priced cheaper. For retail investors, this is often the first sign that value is present in a stock. If we look at the two most widely used metrics, forward P/E and price-to-sales ratios, then VF trades at a 12.5% and 8% premium, respectively.
Hence, with greater growth, Ralph Lauren is worthy of at least the same premium being given to VF, if not more. Thus, using this formula we can estimate that Ralph Lauren is at least 8% to 12.5% cheaper than VF.
Ralph Lauren vs. Nike
Although Nike is operating on a higher level, we can still apply the same formula to determine its value relative to Ralph Lauren and then to determine which is the cheaper of it and VF.
For example, Nike is growing 31% faster than Ralph Lauren over a two-year period. Yet using Nike's forward P/E and price-to-sales ratios, it trades at a premium of just 27.5% and 17%, respectively, versus Ralph Lauren.
Therefore, Nike is actually presenting more value than Ralph Lauren despite the appearance of being more expensive. Moreover, since Ralph Lauren presents more value than VF, this means that Nike is presenting both the most upside and value among its two peers.
At first glance, you wouldn't think that Nike would be the cheapest of these three companies. However, this misconception is only due to the fact that most retail investors use only P/E or price-to-sales ratios and don't incorporate growth into the equation.
By incorporating growth you can get a better idea of the metrics being used to value a company and will be more successful in identifying value in any industry. And while this system is not perfect, it does provide a reliable and consistent way to find potential investments.
The rest is up to you!
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The article Which Retailer Presents the Most Value for 2014? originally appeared on Fool.com.
Fool contributor Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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