Some Under Armour Inc (UA) investors woke up with a jolt on Monday.
Their stock had dropped 49% overnight.
But it wasn’t that the bottom had fallen out of the stock or that the CEO and founder had disappeared with all the money. It was a stock split (or as UA calls it, a stock dividend) that the company announced last month.
It was put in place so that current ownership’s voting rights don’t get diluted as UA continues to issue stock to fund growth and support costs. There were A and B shareholders since the beginning. Now UA has created a class C share that has been distributed to both class A and class B shareholders as a stock dividend. They received one class C share for every A and/or B share they owned up to April 7.
UA Stock Split Isn’t All Doom and Gloom
Doubling the amount of shares has two consequences. First, it cuts the value of the shares by half. It’s like a stock split.
Second, and likely the most important, it helps insure that leadership remains intact for the long term.
As Under Armour has grown — UA stock has pretty much quadrupled in the last 5 years — it has issued shares as a way of funding its impressive growth. The company also has been adding workers and compensation packages that require more capital funding.
If you keep diluting the shares when you need money, the shares are worth less and eventually it becomes easier for someone to step in and buy a piece of the company and look to make changes.
By giving these shares to the current management team, it keeps the company’s vision and strategy on track for years to come.
On Monday, UA dipped on a couple stories. One was golfer Jordan Speith imploded during the Masters tournament on Sunday and ended up second instead of first. He is sponsored by Under Armour.
The second, more substantial concern was a report by a Morgan Stanley analyst who noted that sports apparel and footwear sales were slowing for many companies.
Given UA’s growth-stacked price-to-earnings ratio of 78, this could be trouble. For perspective, Nike Inc (NKE) has a P/E around 27.
However, analysts aren’t unanimous about this trend. Furthermore, what UA has done is an important step to keeping the company on track with its current plan and helps boost stockholder confidence as well as worker morale.
Again, there may be some quarters that are tougher than others, but UA is committed to the long haul, and that bright prospect hasn’t dimmed.
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.
