When it comes to evaluating sports talent, three common phrases sum up what most people care about: “What have you done for me lately?” “What will you do next?” and “How much will it cost?”
In sports apparel company Under Armour’s (NYSE:UA) case, two outta three ain’t bad. Just like its clothing, UA stock is high-performance with plenty more promise — it’s just the topic of price that gets a little sticky.
Under Armour, founded in 1996, has relied heavily on cutting-edge fiber technology to carve out its name in sportswear and performance apparel. Its wares — everything from shirts and shorts to gloves and basketball shoes — are available in more than 80 countries, and while its products traditionally are sold in retail stores like Dick’s Sporting Goods (NYSE:DKS), it also has more than 70 outlet locations and a handful of full-price stores.
Under Armour blasted its way out of the depths of the financial crisis, and now at almost $98, UA stock is up almost 700% since its 2009 lows. That has included a strong year-to-date performance of 36%, more than triple the S&P 500. The company has been growing earnings that entire time, including in its most recent quarter, where it saw profits jump 42% from the year-ago period to $33 million on revenues of $403 million, up 34%.
It would seem appropriate to say “while under the shadow of Nike (NYSE:NKE),” given Nike’s far greater scope. This giant rival is an international juggernaut sponsoring thousands of athletes as well as gearing up a number of international sports teams and colleges. And this year, Nike’s swoosh will be on every NFL uniform.
In reality, Under Armour faces a legion of opponents in sports apparel, but it holds 3% — about half of leader Nike — of a widely competitive market. The $120 billion-plus market is split among 250 companies — from obvious businesses like Lululemon (NASDAQ:LULU) and Adidas (PINK:ADDYY) to even luxury players like Ralph Lauren (NYSE:RL) and Tommy Hilfiger.
And Under Armour has elbowed its way into sports apparel while slowly building up its own star-power portfolio, including sponsorships of U.S. swimmer Michael Phelps, Baltimore Ravens football star Ray Lewis, UFC fighter Georges St.-Pierre and several major universities, including Auburn, Texas Tech and UA’s home state University of Maryland — not to mention apparel deals with the NFL, NBA and MLB.
Under Armour has some pretty ambitious goals going forward, too.
CEO Kevin Plank has been blunt about attacking Nike in the basketball shoe market, where NKE has more than 90% of the market. Last year at the Goldman Sachs 18th Annual Global Retailing Conference in New York, he said about the market, “… I’m not going to make predictions on exactly how much market share, but I would much rather be sitting where we are because it’s coming. We will take market share. It’s a freight train.”
Unlike Nike, UA primarily is a domestic brand. While distributed widely abroad, sales outside North America accounted for just 6% of the company’s $1.47 billion in net revenues for 2011 — about flat from 2010 and only slightly up from 2009.
That’s why Under Armour lists international sales as one of its primary targets for long-term success — and it clearly has room to grow there. It also plans to grow its direct-to-consumer base as a percentage of revenues from its current 20% rate to around 30% by 2013, according to the Baltimore Sun.
And going forward, its financials still look promising, with forecasts for profit growth on the high end of a 20%-25% range, and revenues growth on the lower end of that same range. Analysts are even more hopeful, expecting around 28% earnings growth for the next two years.
Under Armour’s only major hang-up: valuation.
I still remember the first Under Armour ad I ever saw, when NFL defensive end Eric Ogbogu belted out, “We must protect this house!” Of course, he didn’t say anything about selling the house — which is about what you’d have to do to get into UA shares.
Under Armour currently trades at a price-to-earnings ratio of over 50 — more than double Nike’s 24, and well outpacing the S&P average of about 17.
But you have to pay for a rising star, and that’s what you’ve got with UA. If investors keep buying into the Under Armour growth story at current valuations (and UA’s earnings grow as expected), the stock should return about 25% annually for at least the next two years. Even a leaner valuation of around 40 still would bank you 20%-plus gains by that point.
Beating back a world’s worth of sports apparel juggernauts will be no easy task, but Under Armour has managed to become a prominent name in the field in a relatively short time. Between its great track record and its numerous channels for future growth, Under Armour is worth a spot on your portfolio’s roster.