Under Armour Inc (UA) stock has not had the finest 2016. Few stocks have, but Under Armour is a notable underperformer, losing almost 15% year-to-date while the S&P 500 has fallen just under 7%.
Piper Jaffray doesn’t care. Today, the research firm slashed its price target on UA stock dramatically, from $88 per share to $64 per share. Shares still have a “neutral” rating.
Morgan Stanley was even harsher when, on Jan. 11, it cut its price target for Under Armour stock from $103 per share to $62 per share, and downgraded the stock from “equal-weight” to “underweight.”
Today, Under Armour trades in the high $60s, a far cry from its September peak above $105. Unfortunately, I don’t think the UA stock price is done falling. I think a fair value for the stock is somewhere in the mid-$40s.
Why Under Armour Stock Can Fall Another 30%
Under Armour reports fourth-quarter earnings on Thursday, and there may be a reckoning afterwards. Even if there isn’t, 2016 itself will bring more pain for UA stock, simply because this is turning out to be a decidedly risk-off year, and that means reality is bound to set in.
In my Dec. 1 article, “Why UA Stock May Have a MISERABLE Q4,” I mentioned how Piper Jaffray had just cut Under Armour’s price target to $88 from $97. Concerned that high inventory levels would lead to heavily discounted merchandise in the holiday quarter, analyst Erinn Murphy put the stock on notice.
While I acknowledged that could be a possible reason for the downfall of UA stock, the far simpler reason is just simple mathematics:
“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.”
That estimate has since declined to $1.34, so at a forward price-to-earnings ratio of 30, we now get $40.20 as a fair value for UA stock.
If we say that UA deserves, say, a multiple that’s 1.5 times its growth rate of roughly 30%, then we can give UA a trailing P/E of 45. 2015 earnings per share, according to Wall Street, should come in around $1.04 when the apparel company reports on Thursday. Applying the 45 multiple to the $1.04 trailing earnings assumption, we get a fair value of $46.80 — 30% lower than its current price in the high $60s.
While I love Under Armour as a brand and as a company, I simply don’t like it as a stock, and I think Mr. Market is starting to realize that it doesn’t like it at these levels, either.
If you’re invested, you should get out before things get uglier.
As of this writing, John Divine had no position in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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