The growth story for Under Armour Inc (NYSE:UAA, NYSE:UA) is still intact says Jefferies analyst Randal Konik and yet investors continue to ignore UAA stock.
Konik wrote in a Mar. 24 note to clients that investors should reconsider Under Armour stock because it’s growth over the next two to three years will be significant. According to Konik:
“[The] results of our updated proprietary survey … [reveal the] UA brand has strengthened and athletic apparel demand is robust … Our webscrapes, store work, and social trend analysis indicate to us an inflection has formed and the buying opportunity is now. Our view is compressed valuation and negative sentiment, ignore compelling growth over the next 2-3 years.”
Translation: Jefferies thinks UAA stock is a screaming buy. The question is — should you?
I’ve got three reasons why you might want to think twice.
Three Reasons to Be Cautious About UAA Stock
Nike… and Adidas
Paul La Monica’s Mar. 22 CNN Money headline read Don’t just do it? Nike tanks on poor sales. Although, I wouldn’t call it tanking but certainly, a 7% drop in Nike Inc (NYSE:NKE) stock in a single day after announcing its Q3 2017 earnings is a sign investors are definitely concerned about the company’s future growth.
Retail is very weak at the moment, so it shouldn’t come as a surprise to investors that Nike and Under Armour are having a difficult time selling their goods at the moment; it explains Nike’s future orders being down 1% on a currency-neutral basis and 4% on a reported basis.
At the end of the day, Nike sold $15.6 billion in footwear globally through the first nine months of fiscal 2017, 8% higher on a currency neutral basis from a year earlier, and 15 times greater than UAA’s footwear revenue for the entire fiscal 2016.
Frankly, Nike ought to be more worried about Adidas AG (ADR) (OTCMKTS:ADDYY) who recently announced a lofty goal of $5.3 billion in North American sales by 2020, 47% higher than where they are today. In addition, Adidas footwear sales increased by 26% on a currency-neutral basis to $10.9 billion, 10 times Under Armour’s.
If any market share is to be taken in North America by Adidas, it will come at the expense of UAA stock, not Nike.
Making Money
Nike made $3.8 billion in operating profits through the first nine months of fiscal 2017, a 5% increase over the same period a year earlier and 14.8% of revenue; Under Armour generated $417.5 million in operating profit in fiscal 2017, 8.9% higher than a year earlier, representing 8.7% of total revenue.
Under Armour might have grown revenue by 21.8% in fiscal 2016, but that $900 million in additional revenue translated into just $9.0 million in additional operating profits, a measly 1% increase. Nike, on the other hand, converted $1.5 billion in additional revenue in the first nine months of fiscal 2017 into $195 million in additional operating profits, a much healthier 12.7% increase.
Jefferies might be right about Under Armour stock’s growth story being intact, but if it can’t do it in a profitable manner, it will all be for nothing.
Valuation
InvestorPlace contributor Aaron Levitt recently called Under Armour nothing but a T-shirt company and while he was being somewhat facetious, he’s not far off the mark.
In January, I made the case why aggressive investors ought to reconsider owning UAA stock citing its growing direct-to-consumer business as a big reason the upside is far greater than the downside.
To a certain extent, I still believe this. However, Levitt’s comments regarding its valuation have me pondering whether UAA stock isn’t dead money at the moment. According to Levitt:
“Today, Under Amour stock can be had for a price-to-earnings ratio of 44. That puts it richly priced even for many tech stocks. When looking at it through the lens of another clothing stock, it’s insanely overpriced. I’ll give it some growth, but investors are simply paying too much for stock and its potential. NKE can be bought for half that amount and features roughly the same sort of growth projections and a growing dividend, it’s insanely overpriced … I’ll give it some growth, but investors are simply paying too much for stock and its potential. NKE can be bought for half that amount and features roughly the same sort of growth projections and a growing dividend.”
While I agree with his observations, I believe the fact that Nike is doing a better job delivering profitable growth is the biggest reason investors are staying away from UAA stock. Sure, there might be some people out there who view Under Armour as just a T-shirt company, but they wouldn’t be nearly as apprehensive about UAA stock if profits were growing as quickly as revenue.
The fact that both the top- and bottom-lines are slowing should be disturbing to investors.
Is UAA Stock a Buy?
At this point, only speculative investors need apply. If this is for your IRA, you have to go with Nike.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
