Why RBC Is Bullish On Nike, Cautious On Under Armour

RBC Capital Markets analysts initiated coverage of Nike Inc NKE with a bullish rating while the research firm is more cautious on smaller rival Under Armour Inc UAA.

The Analyst: Kate Fitzsimons initiated coverage of Nike's stock with an Outperform rating and $145 price target.

The analyst initiated coverage of Under Armour's stock with a Sector Perform rating and $16 price target.

The Nike Thesis: Nike's 2017 "Consumer Direct Offense strategy" is credited with accelerating market share gains since its launch and has now been replaced with the new "Consumer Direct Acceleration" plan, Fitzsimons wrote in the note.

Highlights from management's strategy to sustain momentum include product innovation in key categories like footwear, 2) focus on the higher-margin digital business, building the "marketplace of the future" that supports full-price sales, 5) international market share gains, especially in China and scaling back wholesale stores.

Related Link: Under Armour Posts Q3 Beat, Sells MyFitnessPal: What Investors Need To Know

Management's clear gameplan coupled with $3 billion to $5 billion in free cash flow a year with capex needs at around $1 billion makes the company an "offensive growth play in the athletic category with a defensible balance sheet," the analyst wrote.

While "not inexpensive," the stock should continue to move higher as top-line growth accelerates and gross margins should improve better than expected.

The Under Armour Thesis: Fitzsimons said Under Armour has suffered from four years of poor performance in North America and is targeting a return to growth in 2021. The company can take advantage of favourable industry-wide trends, especially consumers prioritizing health, wellness and casualization.

Despite apparent tailwinds, Fitzsimons said Under Armour has yet to erase "brand health challenges" that plagued the company in 2019 and early 2020. Propriety checks on social media channels doesn't signal consumers are more excited about Under Armour now compared to a year ago.

Price Action: Shares of Nike were trading lower by 0.2% Thursday morning at $127.35, while shares of Under Armour were lower by 1% at $14.35.