All trends eventually come to an end. No one knows this idiom better than athletic apparel manufacturers who have seen their bread-and-butter “athleisure” trend contract sharply over the past year.
Recently, we saw Nike Inc (NYSE:NKE) post signs of stress from the trends decline in its first-quarter earnings report, and we could see similar results when Under Armour Inc (NYSE:UA) steps up to the earnings podium before the open on Tuesday next week.
Under Armour is actually sitting on quite an impressive trend at the moment. The company has posted revenue growth of more than 20% for the past 25 quarters. Unfortunately, the company has become of victim of its own success, with UA stock down more than 50% this year despite revenue rising 30% and 28% in the first and second quarters, respectively.
Last quarter, Under Armour took a hit as their largest seller, Sports Authority, filed for bankruptcy. As a result, the company missed top-line expectations, leading UA stock to drop nearly 10% in the two days following its second-quarter earnings report.
Looking at the current quarter, Wall Street is anticipating earnings of 25 cents per share on sales of $1.45 billion, according to Zacks. But optimims is pervasive for Under Armour stock, with EarningsWhispers.com putting the whisper number at 26 cents per share.
Additional optimism can be seen in Under Armour stock’s ratings backdrop. Specifically, 18 of the 28 analysts following UA rate the stock a “buy” or better, versus nine holds and just one “sell” rating. The consensus 12-month price target of $53.62 represents a hefty premium of about 39.6% premium to yesterday’s close.
Options traders are just as bullish on Under Armour stock as the brokerage bunch. For instance, the October/November put-call ratio currently rests at 0.59, with calls nearly doubling puts among options set to expire in the next month. This ratio rises slightly t0 0.61 for the weekly Oct. 28 series, indicating a touch more caution, but the overall reading is still quite bullish for UA.
Click to Enlarge Overall, weekly Oct. 28 series implieds for Under Armour stock are pricing in a post earnings move of about 8.9%. This places the upper bound near $41.82, while the lower bound lies at $34.98.
From a technical perspective, the upper bound lies above short-term resistance at $40 and Under Armour stock’s 50-day moving average, while the lower bound has UA trading at multi-year lows.
2 Trades for Under Armour Stock
Put Spread: Poor price action and heavy bullish sentiment are hallmarks for a bearish play in contrarian investing. With Nike already setting the stage for trouble, Under Armour could be in for another selloff following next week’s quarterly report.
This is especially true if we see more write-offs related to the Sports Authority bankruptcy or a continued downtrend in women’s apparel sales (i.e. the main driver for the athleisure trend.
Those traders looking to bet against Under Armour stock ahead of earnings might want to consider a Nov $35/$37.50 bear put spread.
At last check, this spread was offered at 79 cents, or $79 per pair of contracts. Breakeven lies at $36.71, while a maximum profit of $1.71, or $171 per pair of contracts, is possible if UA stock closes at or below $35 when November options expire.
Call Buy: The caveat to the bearish outlook for Under Armour stock is the company’s solid track record (25 straight quarters of 20% gains). Additionally, the shares are beaten down and could be seen as a value buy if quarterly expectations are met and guidance holds firm.
As such, for those traders looking to side with the brokerage community ahead of Under Armour’s earnings, a Nov $37.50 call stands a fair chance of turning a profit.
At last check, this call was offered at $2.10, or $210 per contract. Breakeven lies at $39.60, while a 100% profit on the trade is possible if Under Armour stock trades at or above $41.70 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
