Editor’s Note: The story has been revised to reflect the fact that Piper Jaffray analyst Erinn Murphy was concerned that high inventory would mean more promotional discounting from Under Armour in the weeks following Cyber Monday.
Under Armour Inc (UA) stock has amply rewarded long-term investors in recent years, as the athletic apparel company has grown by leaps and bounds. Between 2010 and 2014, the UA revenue roughly tripled, going from $1.06 billion to $3.08 billion.
Plus, with the inking of up-and-coming world-class athletes Stephen Curry and Jordan Spieth — both of whom put up breakout years in 2015 — to multiyear endorsement deals, UA stock has been on a roll, up 27% this year.
So why, then, was there blood on the streets on Monday, when UA stock cratered nearly 4%?
Well, it had to do with Under Armour’s Black Friday selling strategy, which one analyst in particular took issue with.
Discounted Products, Discounted Price Target
Piper Jaffray analyst Erinn Murphy slashed her price target on UA stock to $88 per share from $97 per share on Monday, and lowered her Q4 earnings-per-share estimate from 46 cents to 44 cents per share.
Her rationale? UA may discount its apparel in the coming weeks, due to high inventory levels. It ran sales for up to 25% off athletic apparel and footwear throughout the Black Friday – Cyber Monday period as well, although that’s not exactly unusual during shopping holidays.
Murphy in particular is fond of extrapolating a company’s pricing strategy around holiday shopping season to its stock price, and yesterday she also reiterated her bullish “outperform” rating and $60 price target on Fitbit (FIT) stock — a level that implied a 116% upside at the time. This was due to Fitbit’s relatively antipromotional pricing strategy over the Black Friday weekend, seemingly implying strong demand.
While deep discounts can certainly telegraph to the markets that inventories are out of control and product needs to move off the shelf, I’m not convinced UA’s 25% sale is just such a desperate move.
That said, I do think the UA stock price faces an uphill battle. In going from a price target of $97 per share to $88 per share, Murphy reduced her earnings multiple from 60 times earnings to 55 times earnings — which is still an awfully gracious multiple.
Sure, earnings per share are expected to rise about 30% next year, but a longer-term growth rate near that level is likely unsustainable. If we charitably still give UA stock a forward multiple of 30 times earnings, taking 2016 EPS estimates ($1.36), we arrive at a fair value for Under Armour stock of just $40.80 — at the end of 2016.
But let’s say we think Under Armour’s multiple deserves to be twice as high as its projected growth rate. (That’s an awfully generous premium, by the way.) Even then, the calculus isn’t attractive for current investors: 2 x 30 x 1.36 = $81.60 per share, meaning UA stock deserves to basically lose another 5% over the next year.
At the end of the day, I’m a fan of Under Armour’s products, and I think the inroads it’s making in footwear especially are exciting, if not game-changing at the moment. A little discounting through Black Friday and Cyber week — the peak holiday shopping season — isn’t reason enough to scare investors away … but an overzealous multiple certainly is.
If UA ends up having a slightly disappointing or just average fourth quarter, I believe we’ll see a reckoning in the UA stock price, as Mr. Market realizes his brash overconfidence.
And I don’t intend on being around when that happens.
As of this writing, John Divine was long FIT stock. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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