In a new Motley Fool series, we pit two stocks against each other on five criteria to determine the better choice.
Today’s matchup is in retail: Nike (NYSE: NKE) vs. Gap (NYSE: GPS). Using five short-of-scientific-but-carefully chosen criteria, let’s determine which is the better choice according to the numbers:
|
|
Factor |
Nike |
Gap |
| Cheapness | (P/E ratio) | 21.5 | 15.3 |
| Growth | (5-year growth rate) | 16.6% | -1.3% |
| Operations | (net margin %) | 8.03% | 7.07% |
| Balance Sheet | (debt/equity ratio) | .06 | .00 |
| CAPS Rating | (scale of 1 to 5 stars) |
Round 1: Cheapness
Advantage: Gap. Cheapness is determined by P/E ratio. The lower the better. Be careful of earnings near zero that skew the ratio, one-time gains and losses, and pasts that aren’t indicative of futures (the more dynamic the industry, the more this is true).
Round 2: Growth
Advantage: Nike. Growth here is the trailing 5-year EPS growth rate. This trailing earnings growth helps put notoriously-optimistic Wall Street projections in perspective.
Round 3: Operations
Advantage: Nike. Net margin percentage shows how efficiently a company turns revenue into profit. The more similar the business models, the more relevant the comparison.
Round 4: Balance sheet
Advantage: Gap. As with net margins, the debt to capital ratio is most relevant in comparing companies in similar industries. In this battle we give the nod to the lower-debt company, but attention should also be paid to the cost of debt, interest coverage ratios, and the stability of the business (the more stable a company’s operations, the more debt it can safely carry).
Round 5: CAPS rating
Advantage: Nike. A company’s CAPS rating is our community’s opinion of the stock. You can get more information on your stocks — and our community’s opinions of those stocks — by clicking over to CAPS area.
Each of these five rankings need more context — like, how these companies stack up against key competitors such as American Apparel (AMEX: APP) and Coach (NYSE: COH). But these basic numbers suggest that Nike is a better buy. What do you think? Let us know in the comments section below.
From above, you can directly choose to buy which. Make your choice.
