Pass On Under Armour Inc (UAA) Stock and Go With Nike Instead

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What a difference 12 months can make. After years of investors shrugging off little to no profits, Under Armour Inc (NYSE:UAA, NYSE:UA) was racking up big gains in the stock market. Now, after rallying from under $15 in 2013 to more than $50 in early 2016, UAA stock has been plummeting.

Pass On Under Armour Inc (UAA) Stock and Go With Nike Instead
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With shares now down more than 50% from the highs it made a year ago, is finally the time to buy UAA stock?

Under Armour’s Dehydrated

When I look at Under Armour, I really want to like it. But there are just too many things that I can’t overlook. For starters, the deterioration in almost the entire retail sector is discouraging.

UAA had become known as a company that was consistently generating revenue growth of 20% or more year in and year out. That’s why so many investors were willing to overlook its lack of profits. Last year, UAA grew revenue 21.7%. This year is another story as analysts only expect sales growth of 11.2%. In 2018, revenue is only forecast to grow 13.7%.

Further, this year’s earnings expectations of 43 cents per share is below 2016’s earnings of 45 cents per share. In 2018, analysts only expect earnings to climb to 51 cents per share. That may represent 18% growth year-over-year, but it’s just 13.3% growth over a two-year period — total, not just for a year.

Some people might argue that Under Armour is a strong brand and has above-average growth. I would agree on both accounts. Its growth is superior to a lot of other companies and I don’t feel that its brand will go the way of Starter.

With that said, UAA stock still trades at ridiculous valuations. Its forward price-to-earnings ratio of 40 and trailing P/E ratio of 51 seem too high. Granted, at 51 times last year’s earnings, UAA is cheaper than its five-year P/E average of 71. But that doesn’t make it okay to buy.

Is There an Alternative?

UAA Stock, UAA, Under Armour, Nike, NKE, NKE Stock
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Source: Chart courtesy of StockCharts.com

For all I know, the bludgeoning will continue — especially if the broader market sees a correction. Instead of Under Armour, I’d rather buy Nike Inc (NYSE:NKE). It trades at less than half the earnings-based valuation assigned to UAA. And, its brand is more powerful, both in the U.S. and around the world.

Not to mention, Nike is one of our Future Blue Chip selections.

  

It’s not fair to compare Nike’s net income of $3.76 billion to Under Armour’s $256 million. Or, is it fair to compare NKE’s 11.6% net margins to UAA’s 5.3%. However, we can compare gross margins, where UAA boasts fractionally better metrics than NKE. But its numbers have been moving in the wrong direction, while Nike’s have been rising over the past four years.

Put simply: I believe that UAA stock will eventually recover and get back to rally mode. It could start any day now. But when I invest, I look at the business. Right now, I’d rather bet on Nike’s business than Under Armour’s. It’s more profitable, has a better brand and appears to have a better strategy.

UAA just got into Kohl’s Corporation (NYSE:KSS). Nike is running a pilot plan on Amazon.com, Inc. (NASDAQ:AMZN), which management confirmed on its recent earnings conference call. KSS versus AMZN: Which deal would you rather have?

Trading UAA Stock

UAA stock has given us a pump fake. After breaking out over prior resistance of $22, it seemed like we had some bullish momentum. But then shares fell 13% from $23 down to about $20. It has since rallied back to resistance and failure to break above it will keep the bears in control.


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There are only a few positives for UAA stock. For instance, some investors likely consider it oversold — meaning it’s due for an eventual bounce.

Additionally, the stock is above its 50-day moving average, which is constructive. Its recent rallies — albeit, short-lived — are also encouraging.

I was hoping the short interest would be higher than 14%, because then a short-squeeze could be on the horizon. Unfortunately, there just aren’t enough positives here for me yet.

When it comes to apparel and retail, investors need to choose wisely. The ground is shifting rapidly and they don’t want to bet on the wrong horse. For me, I feel more comfortable in Nike, even though UAA will have its day in the sun at some point.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell had a long position in NKE. 

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/pass-on-under-armour-inc-uaa-stock-and-go-with-nike-instead/.

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