Investing

Why Merrill Lynch Loves Nike, Under Armour and Footwear Retail Stocks

The beautiful thing for investors when they buy the top companies in casual athletic wear and footwear is that eventually the products, no matter how well they are actually made, wear out. It’s sort of a built-in planned obsolescence that consumers don’t mind, because they need and want the product.

A new Merrill Lynch research note is very positive on the sector, and the numbers are impressive. In fact, the report notes that while January is typically a slower month for casual athletic wear, the sales are continuing to stay solid, while athletic footwear sales on a trailing four-week basis increased 9.4%, with average selling prices rising 2.2%.

Merrill Lynch has four top stocks that are rated Buy in these consumer discretionary sectors, and the stocks are offering some of the best entry points in almost a year. Two are retailers and two are the leaders in the leisure athletic world.

Nike

This stock had an outstanding 2015 but is down 15% in January. Nike Inc. (NYSE: NKE) is the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. With one of the most recognizable brands in the world, long-term investors may do very well adding shares here despite the big move up in the stock last year.

Wholly owned subsidiaries include Converse, which designs, markets and distributes athletic lifestyle footwear, apparel and accessories, and Hurley International, which designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories.

Nike benefits from consumer preferences for “athleisure.” With the company’s extensive product line and recognizable worldwide branding, the stock continues to roll year after year. Driven by its digital business as well as inline and factory stores, the company now anticipates achieving $16 billion in revenue by the end of fiscal year 2020.

Over the next five years, incremental growth in Nike Brand Direct to Consumer (DTC) revenues is expected to be driven by e-commerce sales, which are projected to grow to $7 billion. The company also expects to drive wholesale growth in the mid-to-high single-digit range over the next five years.

Nike investors receive a 1.05% dividend. The Merrill Lynch price target for the stock is $72, and the Thomson/First Call consensus target is $72.56. Shares closed at $60.56 on Thursday.


Under Armour

This apparel leader has absolutely been mauled since October and could have huge upside for investors. Under Armour Inc. (NYSE: UA) bills itself as the originator of performance footwear, apparel and equipment that has revolutionized how athletes across the world dress.

Designed to make all athletes better, the brand’s innovative products are sold worldwide to athletes at all levels. The Under Armour Connected Fitness platform powers the world’s largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal.

The company reported that net revenues increased year-on-year by 28% in the third quarter of 2015. On a currency neutral basis, net revenues increased 31% compared with the prior year’s period. Net income increased 13% in the third quarter, and diluted earnings per share were four cents higher, inclusive of the impacts of the Endomondo and MyFitnessPal acquisitions. The company is expected to report fourth-quarter numbers January 28.

Many on Wall Street are bullish on the hiring of Chip Molloy as the new chief financial officer (CFO) at the company. Molloy did an outstanding job during his tenure as CFO at PetSmart, and having all the personnel in place for the executive team, combined with the pullback of 13% since Black Friday, makes for an outstanding entry point for investors.

The $108 Merrill Lynch price target is well above the consensus target of $102.37. The shares closed Thursday at $69.06.