Forget about the better mousetrap. Founder and CEO of Under Armour Inc (UA), Kevin Planck, went one better. He made the better t-shirt. And his initial $15,000 investment, working out of his grandmother’s basement in 1996 has turned into a multi-billion dollar juggernaut in the intervening years.
In five years, Planck had a $5 million business. In 15 years, Under Armour was at $1 billion. Today, Under Armour is a $15 billion multi-channel international apparel firm that’s growing like kudzu in Alabama.
In the past nine years since UA stock launched, it’s up almost 1000%. Nike Inc (NKE) is up about 330% over the same period.
The brilliant idea behind Under Armour wasn’t try to take on big clothing companies and athletic apparel firms where they already had dominant positions, it was to establish a niche that no one had really gone after — performance training gear, initially for football players to wear under their pads. The shirts and pants could keep you warm and dry in cold, wet weather or cool and dry in hot weather, allowing your body to function without the elements affecting performance.
First, elite athletes donned Under Armour shirts and pants, and then UA went viral. Now, UA sells everything from sunglasses to flip-flops to yes, even cotton t-shirts. The Under Armour label has become ubiquitous and multi-generational in recent years. And Under Armour’s numbers back this up.
Under Armour is only one of four companies in the S&P 500 that has posted 20%-plus sales growth in the past four-and-a-half years. That’s when the broader economy has been sluggish at best and consumers haven’t been willing to spend on much, much less high-end athletic apparel and sporting goods.
But this shows the patient and pragmatic strategy Planck has set out. Each year, Under Armour has found a new market to move into and has been very successful on each attempt so far.
Downside Risk
But on a fundamental level, UA stock only gets a C from Portfolio Grader. Why?
UA stock is trading at 80 times earnings, which may work for a tech stock but is slightly overheated for an apparel company. And given the fickleness of the consumer, the tight margins of the sector and the low barriers to entry of significant competition, there are some real headwinds that investors need to be aware of when jumping on this train.
Remember, UA stock’s great growth story could be its own undoing, since another company could be the next iteration of Under Armour’s dynamic success. UA is now working hard on building its brand, sponsoring events (and athletes) and getting its name out there, which costs a lot of money and those costs get passed on to the products’ pricing.
If consumers find a new hip company, the recovery regains traction and disposable income is reduced or simply investors see this Cinderella growth story past its prime, UA stock could see some serious downside — fast.
But that kind of worry has been a common refrain for scores of stocks in this market and they keep growing, quarter after quarter, year after year. And from a quantitative perspective, UA stock looks really strong, landing an A rating from the Portfolio Grader.
In early December, of the 22 firms that cover Under Armour, 10 issued Buy ratings on UA stock. That’s a positive sign; one even raised their price expectation from 80 to 93 a share.
The point here is, while this is a great story and the company has one heck of a run, it’s not a unique story. If you’re going to take this ride, just make sure you are ready to jump off if things start to look bad, because once this one starts to roll over you’re better on the sidelines than hanging on until it corrects.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
