Just Hold Your Nose and Dive Into Under Armour Inc (UAA) Stock

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Down more than 37% since its September-2015 peak (and still within easy reach of new 52-week lows), it would be easy to liken a purchase of Under Armour Inc (NYSE:UAA, NYSE:UA) to catching a falling knife — you generally don’t want to do it. Bolstering the bearish case against Under Armour stock is the fact that even with the steep selloff, UAA shares are still priced at a frothy trailing P/E of 64 [the old ‘UA’ ticker now represents the class C shares; both are still investable].

UAA: Just Hold Your Nose and Dive Into Under Armour Stock

There simply aren’t too many stocks the market is willing to value at that level for very long.

And yet, if there was ever an exception to the market’s unspoken limits on price multiples, Under Armour stock is it. As uncomfortable as it may feel to do so, investors may just want to shut their eyes, hold their nose, and dive in.

What Went Wrong for UAA Stock?

For those who’ve kept tabs on Under Armour stock for a while, they’ll know the past year or so has been uncharacteristically disappointing. UAA stock — while it was still UA — advanced 2,500% between March of 2009 and late 2015, entirely in step with revenue growth.

It was a pace that was simply unsustainable though… revenue, as well as the stock’s rally.

In its recently completed third quarter, year-over-year sales growth of 22% was, amazingly enough, relatively disappointing compared to the 28% growth driven in the same quarter a year earlier. Q2’s sales growth pace fell similarly. In fact, that slowing pace has been the norm for roughly a year now.

It’s not apt to get better anytime soon either. In October, the company warned its sales-growth rate would fall to the lower 20%’s over the course of the next couple of years.

Perhaps worse, margins have begun to dwindle, as the company finds itself spending more and more, but getting less bang for its buck.

This is admittedly a tougher metric to gauge. Per-share profits for Under Armour stock tend to vary widely from one quarter to the next, with the company willing to spend big on team-based sponsorships and celebrity-based endorsements at the drop of a hat, usually in step with a rise to fame rather than on a cyclical basis.

When one takes a step back and looks at the long-term numbers though, it becomes clear that Under Armour has prioritized growth over profits, paying small fortunes (and sometimes large fortunes) to affiliate with high-profile names like Steph Curry and Jordan Spieth.

CEO Kevin Plank says it’s worth the all cost. The persistent weakness from UA and UAA stock, though, says the market isn’t so sure.

The Future Looks Brighter for Under Armour

There was a method to the madness this whole time. It just took Under Armour far longer to reap what it had been sowing for the past several years … momentum, and a solid foundation. They’re certainly relic ideas in the modern market, where most investors are looking for results in a matter of weeks rather than a matter of years. It has been worth the wait — and expense — for Under Armour though.

Case in point: Under Armour was recently awarded a 10-year contract by Major League Baseball to provide uniforms for its teams, beginning in 2020.

At 40 players on the expanded roster for 30 MLB teams, with different home and away-game jerseys, there’s a little money to be made with the deal. The real value of the contract, however, is the power of putting the Under Armour logo on the front of those jerseys, providing a constant stream of subtle but powerful advertising. Apparel licensing rights will provide the bulk of subsequent payoff. It’s unlikely Under Armour would have been able to sway Major League Baseball, however, if it hadn’t become the behemoth it has become over the course of the past few years.

As Fortune‘s John Kell explained it:

“As Under Armour gets bigger, it makes it tougher for the company to boost sales at a pace that investors were used to. But there’s one advantage that investors seem to be ignoring. The bigger business means Under Armour can compete for key contracts with sports leagues, individual athletes, and universities. Those deals are important for a brand to become more top of mind with shoppers.”

From here, life actually gets a little easier and relatively less expensive for Under Armour.

Bottom Line for Under Armour Stock

The next new frontier for Under Armour is its direct-to-consumer business, or as it’s more commonly called, e-commerce. The company drove $408 million worth of internet-based sales during the third quarter, or roughly 28% of Under Armour’s total revenue for Q3. That’s actually relatively more e-commerce than most brands are able to drive for themselves, but Under Armour wants more.

It’s also getting more. Direct-to-consumer sales were up 29% last quarter, marking another improvement in its e-commerce growth pace even as the pace of sales through brick-and-mortar locales continues to slow.

It’s a key solution to the apparel maker’s problem of thinning margins. Online, Under Armour sells at retail prices rather than wholesale prices.

Whatever the case, e-commerce is another facet that simply wouldn’t have worked quite as well were Under Armour not the readily recognizable name it is now.

To be fair, UAA/UA still aren’t even close to being contenders for any value awards. This is a growth story, and Under Armour stock is priced as a growth stock. There is growth ahead though, and perhaps of more interest to shareholders, there’s now enough scale that margins could take a turn towards respectability again without crimping the company’s capacity to pay for those much-needed endorsements and sponsorships.

Think of it as a coming-of-age story, if you’re truly in for the long run. Just know it’s an idea that isn’t reflected in most analysts’ opinion.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/12/under-armour-inc-uaa-stock-dive/.

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