Under Armour Inc (UA) reported third-quarter results Thursday morning, and it managed to beat both revenue and earnings expectations.
You wouldn’t know that by looking at UA stock, however. After initially jumping on the good news, shares reversed and were off by as much as 5% in early trading.
Despite a record quarter — it was Under Armour’s first quarter ever of more than $1 billion in revenue — it’s not such a bad idea to take some profits on UA stock.
Great Progress, Horrible Valuation
First, let’s take a gander at the numbers. Revenue jumped 28%, advancing to $1.2 billion, topping the $1.18 billion Wall Street expected from UA. Earnings per share also advanced, rising to 45 cents from 41 cents a year ago. Analysts were looking for 44 cents.
Beating on both the top- and bottom-line makes for great headlines, but for UA stock, which was up more than 40% in 2015 before today’s earnings report, a modest beat just isn’t anything too special. In fact, while per share earnings topped the official expectations for 44 cents, they were merely in line with the whisper number of 45 cents.
The highlight of the quarter, and what helped UA post such solid results, was the progress made in its footwear division, where revenue surged 61%. This is precisely where its largest rival, Nike (NKE) does not want Under Armour to succeed, because it threatens Nike’s grip on the multibillion-dollar market.
While it’s unlikely that the Curry One, NBA MVP Stephen Curry’s shoe line, will ever approach the $2.6 billion in annual revenues (just in the U.S.) that Nike’s Jordan brand does, third-quarter sales were impressive nonetheless. Under Armour’s footwear division logged $191 million in sales last quarter, a run rate of $764 million a year.
That’s all well and great, but as I noted a few days back, UA stock is a risky proposition. If shares are bleeding into the red after an earnings beat like today’s, just imagine what would’ve happened if Under Armour missed. Yikes.
I don’t blame investors for taking their profits and running after today’s report. Yes, it was a good quarter, but it wasn’t a legendary one. And while that may sound a little absurd, UA stock has to put up legendary numbers to justify its valuation; UA stock currently trades for about 70 times forward earnings, a comical number that values the company more like a software startup than an apparel company.
While I applaud UA on the progress it’s made, particularly in footwear, I also applaud any investor who bought UA at the beginning of the year. And I encourage those who did to pat themselves on the back, take a deep breath and run for the hills.
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.
