Under Armour Inc (UA) Is Just Too Darn Expensive

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You know what makes me nervous as an investor? Whenever I see a retail clothing company like Under Armour Inc (NYSE:UA) and its stock skyrocket. I’ll tell you why this makes me nervous. History has taught me that hot retail stocks fly high and burn bright … then crash.

Under Armour Inc (UA) Is Just Too Darn ExpensiveI think about Christopher & Banks Corporation (NYSE:CBK) and Chico’s FAS, Inc. (NYSE:CHS). If you look at their charts, you can see the disasters that befall them.

On the other hand, something like Jos. A. Bank Clothiers, which got taken out a few years ago, rose slowly and steadily over many years.

I don’t like UA stock for exactly the reasons I was always afraid of CBK and CHS. There may be one thing about UA stock that’s different, and I’ll get to it in a minute. However, before I do, take a look at UA stock financials.

UA Stock by the Numbers

While revenue, gross profit, and operating profit have been increasing at a very nice rate year over year, net income only increased about 12% from FY14 to FY15. This year so far, UA shows a net loss of $32 million.

Let’s say it magically recovers and does $240 million in net profit. Even then, it is trading at more than seventy times earnings! That’s just insane. Nor does its cash flow somehow justify that valuation. Operating cash flow last year was -$44 million, and it has negative free cash flow of $343 million! So far this year, UA is undergoing a meltdown. Operational cash flow was negative $150 million, and free cash flow was negative $405 million!

UA stock now has $121 million in cash and $838 million in very manageable debt.

You want to explain to me how this valuation is justified?

Look closer. UA is spending gobs of money on marketing. While YOY revenues increased 28% and gross profit increased by almost $100 million, SG&A expenses increased $110 million. Net income came in at $6.3 million, but wait, it gets worse.

Kevin Plank, the founder and CEO, basically controls the company by owning some 15% of the stock. However, a Class C stock was recently created. Holders of Class A and Class B stock got one non-voting share of Class C stock for each share they owned of Class A or B. It is effectively a 2-1 stock split, but where the new shares carry no power. That gives Plank enormous control … over a company trading at over 70x.

Now, is there any compelling reason why UA stock might be worth something close to that valuation? Not really, but here’s what the market perceives: it sees Under Armour as a “competitor” to Nike Inc (NKE). Somehow, the market thinks the UA will take NKE market share away in some significant way.

To that, I say, “Good luck.” But even if UA did manage to take away some market share, it wouldn’t create enough net income or cash flow to justify this insane valuation.

With the overall market stretched to ridiculous levels already as far as valuation, when there’s a correction, UA stock is going to go right down. It’s not worth more than 20% of where it trades now if you ask me.

Lawrence Meyers has no position in any stock mentioned and is the manager of the forthcoming Liberty Portfolio, has 22 years’ worth of experience in the stock market and has written more than 1,500 articles on investing. He can be reached at TheLibertyPortfolio@gmail.com.

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