Under Armour Inc: Don’t Be Fooled, UA Stock Is Still Too Pricey

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The market is still trying to figure out what the latest exodus of executives at Under Armour Inc (UA) means, but all you really need to know is that UA stock isn’t cheap enough yet to go bargain hunting.

Under Armour Inc: Don't Be Fooled, UA Stock Is Still Too PriceyAnytime a company is as hot as Under Armour has been, it’s only natural to start worrying about the sustainability of its growth rate. And when top managers in key areas of business are hitting the exits, it’s only good thinking to wonder why.

As is well known by now, about a week ago UA’s chief merchandising officer and chief digital officer said they will leave the company in July. The shakeup follows the resignation of Under Armour’s chief operating officer and chief financial officer three months ago.

Analysts at SunTrust Robinson Humphrey told clients that the latest departures appeared to be more about “personal life decisions” than any kind of deeper, fundamental problem at Under Armour. Other analysts took similar takes.

Investors certainly hope that that’s the case, but other observers are less sanguine. Here’s what analysts at Brean Capital had to say to clients:

“While we acknowledge high growth companies like UA tend to have higher employee turnover, the departure of leaders like Mr. Stafford and Mr. Thurston layers in additional executional risk, in our view, with Mr. Stafford’s departure likely particularly impactful given his tenure (six years at UA) and leadership on product segmentation … While UA has generally quickly filled key positions with highly talented individuals (see CFO Chip Molloy as prime example), organizational perception is worth monitoring going forward as they seek to acquire new talent.”

UA Stock: A Pricey Underperformer

Whatever these executive moves ultimately mean, Under Armour is priced for pretty hot growth, and anything that throws that into doubt is going to weigh on shares until the worries are put to bed and the multiple becomes irresistible.

We’re not at either point yet.

UA stock’s forward price-to-earnings stands at more than 45. That’s a defensible valuation for when you have a long-term growth forecast of 25% per annum — but it doesn’t leave any room for error. If anything, it’s a stretch in a market desperate for growth stories. And anytime a name gets so richly valued it becomes susceptible to sharp pullbacks on any hint of trouble.

It’s also a rather remarkable forward P/E given that UA stock hasn’t been much of a performer recently. Shares are flat over the last 52 weeks, essentially matching the run of the broader market. And for the year-to-date? UA stock is off 3% when the S&P 500 is up almost 2%.

Investors have been paying an awfully high premium for really lackluster returns. With questions about the sustainability of its growth trajectory and instability in the executive ranks, Under Armour stock isn’t worth the risk just yet.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/under-armour-ua-stock-too-pricey/.

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