by Tom Taulli | January 30, 2014 1:50 pm
If Under Armour (UA) stock was an athlete, today’s performance would make it an Olympic champion. UA stock has spiked by 22% in today’s trading, thanks to a phenomenal earnings report.
Yet again, UA has posted a solid earnings report and continues to find ways to gain on tough rivals, like Nike (NKE). In the latest quarter, the company reported a 26% increase in earnings to 59 cents per share and a 35% jump in revenues to $682.8 million. The Street was looking for earnings of 53 cents and revenues of $619.9 million.
No doubt, it’s been an amazing ride since the company hit the public markets eight years ago. Since then, the stock has racked up gains of 727%.
But can UA stock keep up the momentum? Or should investors be cautious? Lets’ take a look at the pros and cons:
Brand: When it comes to premium sports apparel, Under Armour has become a mega brand. That means that the company can charge hefty prices for its products. A critical factor for the brand’s success has been the use of the products from many top athletes like Tom Brady, Michael Phelps, Anquan Boldin and others. But the brand has also proven to be versatile. For example, in 2006 UA moved into the shoe market, which is likely to be a huge contributor for UA stock growth over the next few years.
Innovation: From its beginning, UA has focused on developing apparel technologies. Of course, the company is the pioneer of moisture-wicking fabrications, which allow adapts better to temperatures and other weather conditions. The main options include Heatgear and Coldgear. But UA has continued to introduce innovative offerings. One is Charged Cotton, which uses synthetics that allow for the absorption of moisture (it dries five times faster than conventional cotton). Then there is Storm, which allows for water-proofed clothing. That innovation should continue to serve UA stock well.
Growth: For the past 15 quarters, UA has posted 20%-plus revenue growth. The company has been aggressive with distribution, maintaining relations with about 1,000 department stores including Dick’s Sporting Goods (DKS), Nordstrom (JWN), Macy’s (M) and Foot Locker (FL). UA has also invested heavily in its ecommerce platform, which is growing at a 30% annual clip. Perhaps best of all, about 90% of UA stock revenues come from North America. In other words, there is massive growth potential in foreign markets. Already UA is working on this, with investments in China, Brazil, Chile and parts of Europe.
Valuation. UA stock is far from cheap. Keep in mind that the price-to-earnings ratio is a hefty 77X (without a dividend). Nike, in comparison, has a multiple of 23X and Lululemon’s (LULU) is 25X. All in all, Wall Street is essentially pricing UA stock for perfection. So even a slight miss could have a severe effect on Under Armour stock — just ask LULU.
Competition. Apparel makers certainly want to get a piece of UA’s action. Notable rivals include LULU and Adidas (ADDYY). Yet the biggest threat seems to be Nike. Let’s face it, Nike has global scale and a mega brand, not to mention tremendous usage with top athletes. And yes, NKE has huge amounts of resources to improve its technologies. Just look at its FuelBand, which is a cutting-edge activity tracker. That’s going to be tough for UA stock to top.
Execution. There is little to criticize UA about. For the most part, the execution and strategy have been flawless … so far. But the risks will certainly get magnified. Moving into foreign markets is no easy feat, and the move will be expensive. It is also far from clear how the brand will resonate. It may take a while to get a hold, as was Nike’s experience building its empire. Along the way, it was not a smooth ride — and the same is likely to be the case with UA.
When Kevin Plank started his business in 1996 — in his grandmother’s basement — he had a bold vision: to redefine the sports apparel business. It wasn’t easy to get off the ground, but he persisted. More importantly, he focused on making the best clothes for athletes. It has proven to be a winning strategy.
But going forward, he will need to deal with some tough competitors. There will also be the risks of going into global markets, which will require large investments and the payoff could take time. Yet investors seem to have become overeager on the expectations, as seen with the sky-high multiple. If anything, UA is under tremendous pressure to execute, with little room for error.
So in light of all this, should you buy UA stock? No — for now, much of the growth has already been factored into the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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