It hasn’t been a good 12 months for Under Armour Inc (NYSE:UAA), to say the least. UAA stock is down by about half, and the company’s struggles have been well-documented.
Investors had insanely high expectations for Under Armour stock, and analysts set their earnings targets accordingly. That had the natural and unfortunate effect of investors fleeing each time these expectations weren’t met.
The biggest carnage has come over the past couple quarters. In its recently reported Q4, Under Armour’s revenues of $1.31 billion and profits of 23 cents per share fell under estimates for $1.41 billion and 25 cents, respectively. The company’s Q3 was better — UAA beat analyst expectations on the top and bottom lines — the day was marred by CEO Kevin Plank telling investors growth was to be less than anticipated going forward.
While growth investors have been dumping UAA stock, though, value investors have started sniffing around.
So the question now is: Are Under Armour shares a bargain, or just cheap?
The Value Case For (And Against) Under Armour Stock
Under Armour isn’t a great value on many of the traditional metrics, with shares trading at nearly 50 times earnings. The forward P/E of roughly 40 isn’t anything to get excited about either, with earnings expected to decline slightly in 2017. UAA isn’t a bargain on the basis of price-to-book or price-to-cash flow, either.
We have to look a little further out for Under Armour stock to be a plausible value investment.
UAA laid out plans back in March 2016 to grow the top line about 20% a year to reach $10 billion in sales by 2020. While that growth rate looks to be in jeopardy, the company is still posting some impressive growth. Sales grew by 21% in 2016, with analysts projecting revenue to increase by 11% in 2017 and 15% in 2018.
Under Armour also will see a nice uptick in the top line in 2020, when the sports apparel maker takes over Major League Baseball’s uniform contract from Majestic. That deal could kick in sooner if Majestic decides to opt out of its current deal before the deadline.
So while UAA stock doesn’t have a cheap P/E, and it likely won’t for a very long time, if we factor in the company’s strong growth potential, we can at least argue that earnings will someday grow enough that you could consider Under Armour a bargain today.
Let’s assume the bottom line will grow by 20% a year after 2017. This is not an unreasonable assumption because Under Armour stock such a high implied revenue growth rate, and as it gets bigger, it’s easier to wring out inefficiencies that crimp the bottom line. There will likely be a greater emphasis on profits going forward as well, rather than revenue.
Earnings are expected to be 42 cents per share in 2017. If UAA’s bottom line grows by 20% a year, the company will post earnings of 73 cents per share in 2020 and $1.81 per share in 2025. If investors then value Under Armour stock at today’s P/E ratio of 49, shares have an implied value of $35.77 in 2020 and $88.69 in 2025.
The issue is, of course, will the market continue to value UAA stock at such a high premium?
If Under Armour can post great results, growth investors will flock back to it. If it struggles, more impatient investors will likely leave, driving down the valuation further.
The Bottom Line on UAA Stock
It’s hard to consider Under Armour stock a value investment. The company has to post outstanding profit growth for a number of years while continuing to get a premium multiple. That’s hard to do.
There are still multiple ways an investment in UAA stock could still work out, however. The company could have a few nice quarters, and investors could bump its inflated P/E ratio even higher. Under Armour also could poach a big-name athlete from a competitor like Nike Inc (NYSE:NKE) or Adidas AG (ADR) (OTCMKTS:ADDYY). Heck, it could even be acquired.
These are all suitable outcomes, but not terribly likely. And they certainly don’t make Under Armour a value investment today.
As of this writing, Nelson Smith did not hold a position in any of the aforementioned securities. You can follow him on Twitter or his own personal blog, Financial Uproar.
