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.
IN PICTURES: 9 Simple Investing Ratios You Need To Know

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.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Trading Center