Last year was pretty messy for Under Armour Inc (NYSE:UAA, NYSE:UA). CEO Kevin Plank wanted to unload a lot of Under Armour stock. To do so, the company split its share structure to create voting and non-voting shares. Then, to add further confusion, the company recently changed the shares’ ticker symbols. This series of events caused investor confusion, resulted in a wide gap between the valuation of UAA stock and UA stock and led to short selling activity.
Aside from the self-inflicted confusion, Under Armour stock had other issues. Curry mania lost steam. Investors don’t seem to like the MLB deal. Margins are falling. Slowness from sector big dog Nike Inc (NYSE:NKE) has caused selling across the area.
Can Under Armour stock turn it around in 2017?
Under Armour Stock Cons
Disastrous Quarter: Late in October, Under Armour stock plunged 13% in a single session following a downbeat earnings report. The problem wasn’t with earnings or revenues, both of which met expectations. Rather, the company warned that growth going forward would be well below analyst estimates.
Combine that with a significant fall in gross margins for the quarter, and it becomes clear that competition is taking its toll. CEO Plank talked on the conference call about the negative effect that bidding wars are having on profitability. One positive, some of the margin pressure was due to liquidations from now bankrupt sporting retail chains. That said, the overall picture of slowing growth and falling margins isn’t a bright one.
Whatever Happened to Connected Fitness? In 2015, Under Armour was constantly talking up its connected fitness prospects. The company has actively acquired in the area. Purchases included Mapmyfitness, Endomondo and MyFitnessPal. All told, the acquisition spree cost more than $500 million and appears to have produced little value.
UA is discussing connected fitness far less this year. The category really appears to have waned in interest. It’s often hard to discern a new trend from a fad ahead of the fact. However, given the drubbing Fitbit Inc (NYSE:FIT) has taken lately, it seems this category is firmly out of favor. Under Armour stock has dropped with it, as enthusiasm wanes.
Basketball Heartburn: Steph Curry had a triumphant 2015. And he took UA stock along for the ride. Shares surged as much as 50% in 2015; 2016 was a different story, as Curry’s shoe sales hit a bump. New releases failed to meet expectations. Many fashion critics panned the Curry 2 “Low Chef” shoes, and the Warriors failed to win the 2016 Championship, despite having a tremendous season.
The 2016 to 2017 campaign is off to a good start for the Warriors. But Curry’s 3 point shooting percentage is down sharply, as are his points per game. He’s only scoring 24 points a game, rather than the astonishing 30 he put up a night last year. He’s still playing at a star level, but it’s definitely down a notch from last year. On the shoe front, the Curry 3 appears to be better received than the Curry 2, so that’s a plus.
Under Armour Stock Pros
Getting Cheaper: Under Armour has arguably been the best apparel growth story of this decade, and UA stock fully reflected that. Shares have generally traded at huge price-to-earnings ratios, at times up to 100. Under Armour stock is now around 50x earnings, and as low as 40x forward earnings.
That’s still expensive, both generally, and compared to peers such as Nike. But it’s a lot easier to make a decent case for UA stock from today’s level. The company has grown revenues at 1-, 5- and 10-year compounded rates all above 25%. If the company can keep its growth at that rate, the price-to-earnings-to-growth ratio is 1.6, which is OK for a fast-growing company. That said, if the P/E ratio is simply dropping because Under Armour’s growth period is ending, the stock could still see more pain ahead.
Buyout Chatter: While you should rarely build your whole investment thesis around merger and acquisition activity, it’s always a perk when it’s possible. On that note, UA stock could be lifted out of its slump due to recurring rumors that someone may take a pass at the company.
Under Armour briefly spiked on Nov. 2 following rumors that Adidas AG (ADR) (OTCMKTS:ADDYY) was interesting in taking over the company. Later in November, shares again popped, this time on suggestions that Nike was interested. Who knows if anything will come of the chatter, but as the share price continues to drop, the odds of a deal do rise.
Fixed Shareholder Structure/Short Interest: Earlier this month, Under Armour consolidated its share classes to try to make the market more efficient. The former UA.C shares traded at a large discount to the old UA stock. These now trade as UA and UAA, respectively. Going into the ticker symbol swap, the inferior share class was trading at as much as a 20% discount.
The only difference in the share classes relates to voting rights. And those have little to no value, since the CEO holds majority voting interest in the company in any case. Thus, many investors were betting against the company, or at least one class of its shares, due to this odd share structure situation. As of last reported data, 13% of the company’s stock had been shorted. There’s a real probability that many of these short positions will start to cover heading into 2017.
Verdict for UA Stock
Under Armour stock is certainly more attractive now than it was a few months ago. The share structure cleanup is a good move, albeit to fix a problem of the company’s own making. And the stock has dropped far enough to significantly improve the valuation picture. That said, UA has gone down with good reason: Growth is slowing, margins are down and it’s unclear when those trends may reverse.
At the time of this writing, Ian Bezek had no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
