Do you own Under Armour (UA) stock? If you do, congrats, because you’re probably sitting on some lofty gains, as shares of the sleek athletic apparel company are up nearly 50% this year alone.
UA stock’s remarkable returns could continue to build upon themselves on Thursday, Oct. 22 — but only if third-quarter Under Armour earnings manage to impress investors. If the premarket report happens to disappoint, however, the miss could be devastating.
Here’s what to keep in mind about UA stock before Under Armour earnings go live Thursday before the bell.
Under Armour Earnings: Expectations Are High
I love Under Armour’s products, and so do many of my friends and family members. I see it becoming increasingly pervasive among sports teams at all levels, and I have no doubt it has the ability to become a $50 billion to $70 billion company someday.
With UA stock trading where it is today, the company has a valuation just north of $20 billion.
Analysts expect UA to keep up its rapid growth rate, and expect revenue to soar to $1.18 billion in the July – September quarter, up 25.4% from the year before. That’s remarkable growth for any company, but it’s especially impressive for a company the size of Under Armour.
UA stock should also see earnings per share rise from 41 cents to 44 cents, according to consensus estimates. So why am I hesitant to recommend buying into what could morph into the Nike (NKE) of the 21st century?
Beware the Alarm Clock
“One man’s whistle tip is another man’s unwanted alarm,” reads the famous Nietzsche aphorism. In other words, and as I’ve noted before, the UA stock price is trading too high for its own good.
Unfortunately (depending on how you want to look at it) for UA stock owners, shares look dramatically overbought at today’s levels. And as soon as a noisy shortseller starts badmouthing UA, or a major shareholder takes some gains and goes elsewhere, a cacophonous selloff will ensue, rudely awakening slumbering shareholders.
An earnings miss could also very easily do the trick for UA stock.
Extrapolating from previous Under Armour earnings reports may give investors the false illusion that an earnings and revenue beat are essentially guaranteed. In fact, UA stock hasn’t missed on EPS once in the trailing 14 quarters. And it’s beaten revenue expectations for 26 consecutive quarters.
Eventually, Wall Street starts to catch on to the fact that UA essentially lowballs guidance, and the Street begins to formulate less formal predictions of its own.
The “earnings whisper,” or unofficial EPS prediction for 3Q is 45 cents, a penny per share higher than the 44-cent official reading.
With Under Armour increasingly taking on Nike in places like footwear, where UA sponsors NBA MVP Stephen Curry, a young star with a long, bright future ahead of him, I have no doubt we’ll be talking more and more about this company in the years to come.
Investors certainly shouldn’t worry about China’s softening economy hitting Under Armour earnings, as 91% of its sales came from North America last year. In fact, UA might actually enjoy a boost from China’s weakening currency, since about 65% of its products were manufactured in China, Jordan, Vietnam and Indonesia.
On top of that, UA is going up against companies like Fitbit (FIT) and products like the Apple (AAPL) Watch with its recent acquisitions of digital fitness platforms aimed at tracking calories, motivation and healthy weight loss.
Under Armour, the company, has a great future ahead of it … But UA stock, trading at more than 70 times earnings, I can’t get behind. Not at these levels.
And if we see gross margins erode — last quarter we saw them fall from 49.2% to 48.4% — we could see a precipitous selloff.
“Sometimes the sideline is the best position,” reminds Nietzsche.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
