Under Armour: Athletic Innovation

08/11/2015 8:00 am EST

Focus: STOCKS

We are upgrading our rating on this maker of performance apparel and footwear; its products have become popular with competitive athletes and consumers with active lifestyles, asserts analyst John Staszak in Argus Outlook.

We expect Under Armour (UA) to become a top global athletic brand based on its unique apparel, history of product innovation, and effective marketing.

The company also appears well positioned to become a leader in digital fitness products.

We expect UA’s innovative product technology to bring more customers to the business and drive top-line growth as well as gross margin expansion.

In 2011, the company launched Charged Cotton, which has the softness of natural fiber, yet dries five-times faster to reduce the discomfort that results when cotton becomes drenched with perspiration.

Another product, Storm Cotton, combines the feel of cotton with a water-repellent finish. These innovative cotton materials are helping the company to address the huge active apparel market and helping to make the long-popular hooded sweatshirt more functional.

The shoe business is a risk, as well as being a huge opportunity. We believe that the shoe business is more complex than apparel and that the company must demonstrate that its products have the comfort, functionality, and durability of competitors’ offerings.

We are raising our 2015 EPS estimate from $1.10 to $1.12, representing an increase of 18% from 2014.

Our revised estimate assumes a 24% increase in sales and a 16% increase in operating income to $409 million, slightly above management’s revised guidance range of $405-$408 million.

We are also raising our 2016 estimate from $1.40 to $1.44, representing a roughly 29% increase from our 2015 forecast.

We caution that UA shares are likely to be volatile and thus suitable only for risk-tolerant investors.

Although UA shares have run up strongly in 2015, we believe that the current share price near $99 undervalues the company’s solid growth prospects. Our target price is $120.

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