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Don’t Get Burned by Under Armour Stock

The apparel and footwear maker is on fire, but a sky-high valuation makes UA stock too hot to handle


Under Armour (UA) stock sprinted to double-digit gains Thursday thanks to a beat-and-raise quarterly report, but investors would do well to keep their sweaty hands off this maker of athletic apparel and footwear.

under armour stockFashion, after all, is fickle. You never know when a rival will top your technology and marketing, stealing the hearts and wallets of your customers. And competition in this industry is particularly intense. Ever heard of a little company called Nike (NKE)? It’s stock is a component of the Dow Jones Industrial Average, and even NKE has its challenges.

Most importantly, Under Armour stock is way too expensive. It sports a forward price-to-earnings multiple of 58. At this point, readers usually slam me on the valuation, saying something like Under Armour is growing so fast that it’s worth it. “Hey, everyone at the gym wears Under Armour!”

Well, you see Nike and Adidas (ADDYY) plastered on backs, feet and billboards too … but that doesn’t necessarily make their shares worth buying. Under Armour just doesn’t have the growth prospects to justify a forward P/E of 58.

Analysts peg Under Armour’s long-term growth forecast at 24%. That’s a hot-growth stock, no doubt, but a 24% growth rate makes it worth maybe 35 or 40 times earnings. Indeed, Under Armour has a five-year average forward P/E of 40. The current P/E is too much of a stretch — especially this late in a bull market when valuations are just begging to mean-revert.

Under Armour Stock Has Gotten Ahead of Itself

True, Under Armour has some terrific trends at its back. Over the last five years, the number of people aged 18 to 34 engaged in running/jogging grew to 24 million from 19 million. Yoga nearly doubled, to 11 million from about 6 million.

Under Armour’s latest quarterly results looked pretty good. Profit barely budged, coming in at $17.7 million, or 8 cents per share, beating Wall Street estimates by a penny. Even better for Under Armour stock, the company raised its revenue forecast by a healthy margin. UA expects full-year sales to come in between $2.98 billion and $3 billion, up from a prior projection of $2.88 billion to $2.91 billion.

Under Armour is having good success with new footwear offerings. Sales jumped 34% to $110 million. Apparel sales did even better, rising 35% to $420 million. Under Armour has shown that it can expand into whole new categories — including golf and yoga — and be well received. Its future is bright.

But that still doesn’t make the stock worth 58 times forward earnings. Price is what you pay; value is what you get. Under Armour stock is no bargain. Even a momentum stock needs top-line growth of more than 35% to make a 58 P/E ratio palatable.

Under Armour stock is up about 40% for the year-to-date, and it probably has more upside ahead based on the technicals alone. That might make Under Armour worth a trade, if that’s your bent.

As for a long-term holding? No way. Valuation always reverts to the mean eventually — especially in the apparel and footwear industry, which is littered with once-hot brands.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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