Under Armour (UA, UA.C) has put up a championship-level performance for investors in recent years. Adjusting for stock splits, UA stock has gone from below $2 during the financial crisis to $37 today. And really, considering the effective 2-for-1 stock split earlier in 2016 that created Class C stock, Under Armour is closer to $70/share. The company has benefited from a variety of factors; recovering consumer spending being one key driver.
Recently, the growth story for Under Armour has gone to the next level with the historic achievement’s of Under Armour’s leading spokesman, Steph Curry. As his achievements on the court pile up, his shoe sales are ascending right alongside them. He’s just had another excellent season, and his team looks poised to win another NBA championship.
The key question going forward: Will the buzz keep lifting UA stock as well?
UA Stock Pros
Hottest Basketball Brand: Steph Curry’s line of basketball shoes is now the best-selling among all active players. There still aren’t any current players that can come close to Jordan’s sales. However, among active players, Curry is projected to produce $160 million in 2016 shoe sales, moving him narrowly ahead of LeBron James for the top spot.
Deutsche Bank reported that Curry’s shoe sales were up more than 300% versus the same period in 2015 to start this year. That’s helping Under Armour stock owners benefit as sales rose 64% in its overall shoe business last quarter. If Curry remains the league’s star for a few years, he could turn into a Jordan-like figure, leading to shoe sales close to a billion dollars per year. Whether that happens or not remains to be seen; however for UA stock, it’s an exciting possibility.
Huge Growth: UA stock isn’t a one-hit wonder just driven by Curry, however. The company has been on a tear even before the recent basketball success. The company has averaged growth rates in excess of 23% for revenues, EBITDA growth, and book value growth over the past 10 years. It’s no surprise UA stock has soared with that sort of growth underpinning it.
In full-year 2006, the company did $431 million in revenue. In 2016, it’s on pace for more than $4.9 billion in sales; that’s more than a tenfold jump. Similarly, from full-year 2005 to full-year 2015, earnings grew from 5 cents per share to 53 cents, another tenfold increase. At analysts’ projected 25% growth rate in coming years, the company should double again in size in 2019.
International Expansion: In recent years, Under Armour has tried to expand its brand outside of the US. 10 years ago, the company was tiny, with under $500 million annually in sales; there was no need to go abroad. But the game has changed.
Over the past couple years, Under Armour has boosted foreign sales from 14% to 17% of the overall mix. But this could and probably should be a lot higher. Competitor Nike (NKE) derives just over half its sales from overseas markets. The NBA has a rapidly growing international presence, and having the league’s star signed to Under Armour should give the company the opportunity to become more familiar to foreign consumers.
And Under Armour stock owners, of course, will reap the rewards. But it’s not all pros with this Nike competitor.
UA Stock: Cons
Expensive: Under Armour stock currently trades at 68x trailing earnings. Obviously, that’s rather expensive, and requires huge growth to justify. Even assuming the company doubles in size over the next three years as analysts forecast, you’d still be at 34x earnings in 2019. And that’s assuming no growth in the stock price.
Assuming that the company’s growth rate then slows to 15% in 2019 after three years of 25% growth, earnings would again double in the year 2024. At that point, you’d have a company trading at 17x earnings. If you’re willing to wait that long for the company to grow into its earnings multiple, UA stock can be bought here. But I fear that many investors are playing a game; assuming someone will be willing to keep buying UA stock at unusually high earnings multiples. At the first sign of trouble, the P/E ratio will fall.
No Dividend: In conjunction with the previous point, it’s worth remembering that UA stock currently doesn’t offer a dividend. The company is focused on growth rather than returning capital to shareholders.
That’s fine — a company should invest its money in its operations when there are good opportunities. But the lack of a dividend means there is no insulation if anything goes wrong with the growth story. With Under Armour at 68x trailing earnings, you are paying a steep price for growth with no reward for your patience if the stock can’t keep rising.
Balance Sheet Concerns: UA stock has been following the general growth trajectory around the company’s sales and earnings. But other metrics aren’t quite so favorable. For one, there’s another thing growing: the company’s inventory.
For a company with rapid growth, you should always check to see how much finished product they are holding. If inventories build up, it can be a sign that the company is being too aggressive in its rate of expansion; moving faster than demand calls for. In Under Armour’s case, inventory has almost doubled since the end of 2013, and is up fourfold since 2010. This isn’t outlandish, given the rate of sales growth, but it’s worth watching.
Under Armour has done a poor job of converting the growth to cash; free cash flow from the business has been quite poor. Furthermore the company is taking on debt, while its cash pile fell from $593 million at the end of 2014 to less than $200 million today. Longtime CFO Brad Dickerson also resigned recently. CFO resignations don’t necessarily mean anything is wrong, but it’s something to watch with rapidly growing companies who have things such as rising inventory levels that make one nervous.
Under Armour Stock: Verdict
Under Armour is doing a great job running its business, and UA stock has made plenty of people wealthy. The stock, however, isn’t a buy at this valuation. You’re paying for many years of growth that may or may not materialize. If Curry becomes the next legend of basketball, UA stock is still going higher. But an injury or falloff in his performance could really send things in the wrong direction. And with no dividend and a 68 P/E ratio, you need to be pretty sure the shots will keep dropping; otherwise it will be UA stock that takes a tumble.
At the time of this writing, Ian Bezek had no position in any of the stocks mentioned. You can reach him on Twitter at @irbezek.
