Why Under Armour Inc Wavered Despite A Blowout Quarter (UA)

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Shares of the sports apparel company Under Armour (UA) fell nearly 7% in premarket trading on Thursday on the heels of its third-quarter earnings report.

After markets opened, however, shares staged a comeback and even flirted with break-even levels. Let’s check out the double-edged sword causing investors to waver on UA stock today.

A Blowout Quarter for UA

under armour inc stock falls third quarter earningsBy most accounts, UA’s quarterly results were phenomenal. Both sales and earnings at Under Armour exceeded expectations: Revenues grew by 30% to $938 million, and net income jumped nearly 22% as earnings came in at 41 cents per share.

Analysts were expecting $928 million in sales and earnings of just 40 cents per share.

On top of that, footwear sales jumped 50%, international revenues spiked by some 94% year-over-year, and Under Armour raised both its full-year 2014 revenue and operating income outlook. UA has been redoubling its efforts in the footwear division in an effort to take market share from the likes of Nike (NKE) and Adidas (ADDYY), so it’s great for investors that UA’s efforts are resulting in the rapid growth the company hoped for.

On top of that, the 2014 third quarter marks the 18th consecutive quarter of 20% sales growth — a remarkable streak that neither NKE or ADDYY can touch with a ten-foot pole.

So, if Under Armour’s doing so darn well, why did UA stock briefly fall off a cliff on Thursday?

Wall Street’s Greed Demands Breakneck Growth

Before delving into the bearish case for UA stock, let’s get one thing out of the way: Under Armour’s growing success in footwear is a huge deal and a great opportunity. With 50% sales growth in the shoe division, footwear now makes up 13% of Under Armour’s total revenues compared to 11.2% in the same quarter last year.

Unfortunately, Under Armour’s footwear segment still faces an uphill battle. The reigning NBA MVP Kevin Durant turned down a 10-year megadeal with UA this summer reportedly worth as much as $285 million, snubbing the Maryland company for archrival Nike.

As far as the quarter’s financials are concerned, Wall Street — despite what consensus estimates say — may have been expecting higher EPS numbers. One of the stock market’s dirty secrets is that there’s a formal EPS expectation and a separate “whisper” earnings number that insiders are expecting. While UA posed a 41-cent EPS in the third-quarter, technically beating estimates by a cent, the “whisper number” was 42 cents.

For a stock that has roared 50% higher in 2014 — and trades at more than double Nike’s forward P/E — if you’re not beating official and unofficial expectations, Wall Street tends to get grumpy.

Given the high expectations and the frothy valuations UA stock trades at, nothing short of red-hot growth can send shares higher from here. While Under Armour is a great company with mouthwatering growth prospects, it’s also an incredibly risky investment for the same reasons. Investors should tread cautiously with UA stock.

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As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/under-armour-inc-stock-falls-third-quarter-earnings/.

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