Lululemon Vs. Morningstar: Which Is The Better Stock?

By Will Ashworth | November 15, 2010 AAA

I read recently that Treasury secretary Tim Geithner bought shares of Lululemon (Nasdaq:LULU) a few years ago to teach his two children about the stock market. It turns out that Geithner's daughter is a big yoga fan and uses the Vancouver-based company's products. It's been a profitable bet, as Lululemon's shares are up 55% this year alone. I have written several articles in the last year about the sales gap between Lululemon's U.S. stores and those in Canada. Perhaps LULU can get the same lift at its American stores that J. Crew (NYSE:JCG) got from Michelle Obama. However, before I get too far off topic, I thought I'd take this opportunity to compare Lululemon with Morningstar (Nasdaq:MORN), a company with similar revenues and operating margins, answering the question of which is the better stock.
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Income Statement
The first thing I'll examine is the total remuneration of both the officers and directors as a percentage of net income. This type of comparison is only useful when looking at companies of similar size. I wrote an article in 2009 that said Morningstar CEO Joe Mansueto's salary was just $100,000 because his majority ownership of the company was compensation enough. In 2009, Lululemon's officers and directors received $6.6 million in total compensation, which was 11.3% of its $58.3 million in net income. This compares with $5.1 million in total compensation for Morningstar's officers and directors, amounting to 6.2% of its net income. Score one point for Morningstar. Up next is revenue and profit per employee. Another point for Morningstar. Its revenue per employee in 2009 was $151,350, 8% higher than Lululemon and its net income per employee was $26,070, 44% higher. Morningstar easily wins the income statement portion of the competition.

Cash Flow Statement
Here I'll start by comparing the cash flow return on invested capital for each company. On this one, Morningstar gets hammered. Lululemon's return is 36.2%, almost six times that of Morningstar. It's so one-sided that I'm going to award two points to Lululemon for their excellent use of capital. The second of two comparisons is free cash flow as a percentage of sales. Higher is better on this one as well. Morningstar beats Lululemon by just 80 basis points, 18.9% to 18.1%. While I'm tempted to call it a draw, I'll give the point to Morningstar. At this point, it's close with Morningstar leading three points to two.

Balance Sheet
For this part of the comparison, I'll use the current ratio, which tells us how well each company is able to meet its short-term obligations and financial leverage, which is current assets divided by current liabilities. Lululemon's current ratio is 5.55, which is 2.67 times Morningstar's, so it gets a point. As for financial leverage, both firms use debt sparingly so I'll call it a draw and award no points to either firm.

Valuation
Both stocks aren't cheap at current prices. However, with the exception of the PEG ratio, Morningstar's valuation is far less expensive than Lululemon, which doesn't come as a big surprise. For instance, take the price-to-sales ratio and multiply that by the price-to-book ratio and you get 67 for Lululemon and 16 for Morningstar. There's really no comparison and as such, I must give the final two points to Morningstar.

Bottom Line
The final score is five to three in favor of Morningstar, thanks in large part to the valuation disparity. When you factor in competitors like Nike (NYSE:NKE) and Under Armor (NYSE:UA), which will provide plenty of competition for Lululemon in the future, Morningstar is the better stock to buy right now. (Did you have a tough time keeping up? Check out our Financial Ratios Tutorial.)

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