Things looked pretty good for Under Armour Inc (NYSE:UA, NYSE:UAA) stock back in 2015. Under Armour’s star athlete, Stephen Curry, was following up an MVP and NBA championship 2014-15 season with a scintillating start to the 2015-16 season.
That wasn’t all. The company’s principal golfer, Jordan Spieth, was in the midst of one of the greatest Majors runs in golf history. Cam Newton, another Under Armour athlete, was having a historic season while leading the formerly no-name Carolina Panthers to a league-best 15-1 record. The company’s biggest baseball endorser, Clayton Kershaw, had won back-to-back Cy Young Awards in the National League in 2013 and 2014.
As a result, UA stock revenues were continually growing in the 25% to 30% range, and Under Armour kept making new all-time highs.
All signs pointed to go. Under Armour seemed destined to challenge Nike Inc’s (NYSE:NKE) multidecade dominance in the athletic retail market.
But then everything changed.
Curry and the Warriors ended up on the wrong side of history in the 2016 NBA Finals, and Curry lost his cool along the way. Spieth went major-less in 2016. Newton and the Panthers tumbled from a 15-1 regular season record in 2015 to a 6-10 finish in 2016. Kershaw got injured, and UAA stock got hurt even worse, losing about a quarter of its value in 2016.
The Change for UA Stock
All things considered, that sharp loss of value for UAA stock shouldn’t be any surprise to investors. When your tailwinds (Curry’s NBA Championship, Spieth’s Major wins, Newton’s record-setting season, Kershaw’s hot streak, etc.) turn into headwinds, revenue growth will naturally slow from a low 30% range in 2015 to 12% by the fourth quarter of 2016.
Those who follow UAA stock also shouldn’t be surprised that management guided for low-double-digit revenue growth going forward. The underlying story is actually getting weaker. Most notably, Under Armour is losing traction in the all-important basketball market.
In a move that shocked the basketball world during the summer of 2016, Nike’s Kevin Durant left Oklahoma City to team up with Under Armour’s Stephen Curry in Northern California. That means Warriors basketball, which was formerly the Curry show, is now the Curry-and-Durant show. That is bad for Under Armour and UA stock, because any reward from the Warriors doing well is now shared between Nike and Under Armour.
UAA Stock Valuation Is Still Too Rich
Despite trading at multiyear lows, UAA stock remains far too richly valued to be considered a value play here.
Under Armour earned 58 cents in earnings per share last year (non-GAAP). The Street is calling for 42 cents next year. That number is supposed to grow to 51 cents in fiscal 2018 and 60 cents by fiscal 2019.
Essentially, between now and 2019, Under Armour’s earnings are projected to be flat.
Despite that bland growth outlook, UA stock trades at an ultra-rich 37 times trailing price-to-earnings multiple. It really makes no sense that a stock with essentially zero growth expectations on the bottom-line is trading at 35.6-times trailing earnings.
Meanwhile, the S&P 500 is trading at around 20 times trailing earnings for low-double-digit growth expectations over the next several years. At these levels, there really isn’t much reason for investors to buy Under Armour rather than an index-tracking exchange-traded fund.
There isn’t much else to like about UA stock here. Under Armour’s balance sheet has more debt than cash. The company has struggled getting to free cash flow positive over the past several years. Gross margins contracted 320 basis points last quarter. Operating margins compressed 250 basis points.
There is no dividend on UA or UAA, and the company isn’t buying back shares.
Bottom Line for Under Armour
Even at multiyear lows, UA stock sports an ultra-rich valuation. The underlying growth story continues to deteriorate. Earnings won’t grow from last year’s $0.58 non-GAAP base until 3-plus years out. There is no reason to own Under Armour here, and I wouldn’t be surprised to see shares head considerably lower.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
