Has Under Armour Hit Bottom?

08/29/2017 2:54 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Kevin Plank founded Under Armour (UA) in the 1990s; the linebacker for the University of Maryland didn't like wearing cotton t-shirts, which got heavy when soaked with sweat, explains Ian Wyatt, editor of Million Dollar Portfolio.

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Under Armour was founded in 1996 in the basement of his grandmother’s townhouse; Georgia Tech was his first customer, buying $17,000 worth of product for their athletes. Within three years, the company's sales topped $1 million.

Since then, the company's growth has continued as it has formed partnerships with athletes and sponsored college athletic teams.

The company competes directly with Nike (NKE) and Adidas (ADDYY). Nike generates more than 50% of the sales from shoes. At Adidas, 80% of sales are footwear. At Under Armour that number is only 21%.

Compared with Nike ($34 billion sales) and Adidas ($21 billion sales), Under Armour is a small competitor. Last year, the company generated $4.83 billion in sales.

Under Armour is currently growing its sales at a healthy double-digit clip. The company is expected to grow sales by 8.6% in 2017, and another 14% in 2018.

The combination of slowing sales, increased expenses related to team sponsorship, and several product missteps have sent shares plunging. The stock is down about 66% from its all-time highs.

Additionally, an Adidas line of retro shoes have been taking market share from both Nike and Under Armour. Further, retailers have been under pressure due to increased competition with Amazon (AMZN).

Consumers may be shifting their buying habits online, but they're still buying athletic apparel made by companies like Under Armour. In fact, Under Armour currently had over 29,000 products listed with Amazon.

Under Armour earned $0.45 per share in 2016. This year, that number is expected to shrink to $0.38. Yet in 2018, analysts are expecting a rebound back to the $0.45 level.

On that basis, Under Armour shares are trading at around 45-times earnings. Yet the earnings don't tell the full story, due to some of the company's recent operational challenges. When we look at the price-to-sale ratio, we get a different story.

Under Armour has a market cap of $7.25 billion. Compared with the projected sales of $5.25 billion, the company trades at around 1.4-times sales — a discount to Nike (2.7-times sales) and Adidas (1.8-times sales).

If Under Armour is able to improve its operational efficiency and profitability, the stock should trade at an increased valuation multiple. A fair multiple for the stock would be two-times sales, which would translate into $23 per share.

Investors may have to be patient with this stock. The recent and sharp decline certainly removes a lot of the downside risk. Given the valuation, it appears that this could be a bottom for the stock.

I'll initiate with a small position in Under Armour. I plan to buy the Class C shares, since they trade at a discount to the Class A. Under Armour's CEO controls the majority of the class A voting stock, so it simply makes sense to buy the non-voting shares.

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