Under Armour Inc (UA) stock was down as much as 2% in trading on Tuesday after the popular athletic apparel company announced the pending departure of its CFO and COO, Brad Dickerson.
Dickerson, who has been with UA since 2004 and will leave the company in February 2016 to pursue “another professional opportunity outside of the athletic performance industry,” has been a key part of Under Armour’s rapid rise to prominence, according to CEO Kevin Plank:
“During his time at Under Armour, Brad has played an integral role in providing value for the company by building a strong team and demonstrating a core competency of accelerating growth, taking the company from pre-IPO to a multi-billion dollar global business.”
Given Dickerson’s importance, today’s reaction from Wall Street is certainly understandable. The unfortunate thing for UA stock holders is that this is just the tip of the iceberg, and things could get worse in a hurry.
UA Stock Is Its Own Worst Enemy
The departure of a CFO often drives that company’s stock lower. NVIDIA Corporation (NVDA), Oracle Corporation (ORCL) and many other stocks have experienced this phenomenon in recent years.
It can send an ominous signal to investors that perhaps the financials won’t be up to par going forward.
Let me be clear: I don’t think UA stock has to worry about an accounting scandal at all … I certainly doubt Under Armour would keep Dickerson aboard for another four months if someone was cooking the books.
I do, however, believe UA stock faces some rather serious overvaluation risks — shares are up a remarkable 50% this year alone. I encourage investors (especially those looking to de-risk their portfolios) to take their profits and run.
Under Armour shares currently change hands at 72 times forward earnings, about four times the forward P/E of the S&P 500 and about three times that of its most visible competitor, Nike (NKE).
Don’t get me wrong, I absolutely love Under Armour’s business, and have no doubt that the company will continue to grow sales for years to come. Its signings of NBA star Stephen Curry and PGA phenom Jordan Spieth have both reaped enormous rewards this year. Curry won both the NBA MVP award and his first NBA championship with the Golden State Warriors, while Spieth surged to national prominence by winning both the Masters and U.S. Open at the tender age of 21.
Still, I have difficulty coming to grips with a $21 billion market cap for UA, giving it a valuation of 6.5 times sales — nearly double the 3.5 times revenue NKE trades for. Plus, in a risk-off environment like the one we saw in August amid the China selloff, investors flee to safer names. UA stock was trading around its current levels of more than $100 per share before the panic hit, driving shares all the way down to $85 a pop.
Sooner or later, there will be a reckoning in the UA share price. Truthfully, it may come later this year if the Federal Reserve chooses to hike interest rates.
Bottom line? Investors should simply be aware of the risk inherent in UA stock. The CFO leaving isn’t going to wreck shares … but the slightest shift in sentiment could.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
