Often, the best time to load up on a stock is when everyone hates it, and right now everyone hates Under Armour Inc (NYSE:UAA). Some mistimed praise for the new administration, an earnings miss and over-reaction to the company’s two-tier ownership structure — which makes CEO Kevin Plank as secure in his job as Facebook Inc (NASDAQ:FB) CEO Mark Zuckerberg — combined into a perfect storm for UAA stock holders.
Since Under Armour peaked in October 2015, shares are down nearly 80%. That’s despite the company’s 20% sales growth during 2016 and 10% growth in earnings.
Debt rose during 2016 by approximately 20%, but assets rose 25%, so debt as a percentage of assets went down slightly. Operating cash flow also took off in the fourth quarter, exceeding $300 million.
It’s enough to make a contrarian want to call his broker.
What’s Wrong at Under Armour?
There are serious reasons for concern. The sell-through on Under Armour shoes is down 20%, but shoe sales must grow for the company to meet long-term goals.
Management made some big mistakes in 2016, increasing inventory and promotional spending just as Sports Authority, one of UAA’s biggest retail outlets, was disappearing and other retailers were under severe attack from online merchants.
The earnings miss, however, was not by a mile. Earnings per share was 2 cents short of expectations, revenue was short by $100 million and management guided down to $320 million of 2017 earnings, after earning $258.66 million in 2016.
Chip Molloy, who had joined UAA as Chief Financial Officer in January 2016, left for unspecified personal reasons. But he isn’t the guy who built this company.
Kevin Plank is the guy who built Under Armour. He’s now exercising damage control on the Trump comments, insisting that his praise was based on economics, not social policy.
What’s Right at Under Armour?
Plank wrote about Trump right after debuting new athletic apparel that’s made in Baltimore, part of a radical rethink concerning UAA’s supply chain that should benefit American workers. When your actions are politically correct, you look for credit. Some endorsers just took it personally.
Under Armour hopes to shore up its shoe line through a deal with Real Madrid, one of the world’s most popular soccer teams. Additionally, management has launched a new streetwear line from ballerina Misty Copeland, and early reviews are positive. The political disagreements look like water under the bridge.
It’s true that 2016 wasn’t a great year, but when your top-line sales grow 20% in a bad year, what do you think happens in an average year? Morgan Stanley analysts now think shares of UAA stock are fairly priced, and if Under Armour can hit that $320 million earnings number, with 183.7 million “A” shares outstanding, the forward price-to-earnings ratio comes down to 28, which isn’t terrible given the sales growth.
Bottom Line on UAA Stock
Speculative growth stocks like UAA rise fast and fall hard. It’s the nature of the beast.
The fall of Under Armour over the last year has taken its market cap below $10 billion, a critical level for many analysts and mutual funds, which call such a level “mid-cap” instead of “large-cap” and give such stocks less trust.
Under Armour’s market cap is now about level with that of Lululemon Athletica inc. (NASDAQ:LULU), whose sales of $2 billion are less than half of Under Armour’s $4.8 billion. While Under Armour was rumored to be going after Lululemon at its height, now Lululemon founder Chip Wilson, who is no longer with the company, wants Lululemon to buy Under Armour.
There is both a lesson and an opportunity here. UAA could gain fatter margins by selling more of its wares directly to consumers, rather than through retailers. But, that’s no reason to junk an underpriced stock for an overpriced one.
My bottom line is that, if you like playing entrepreneurs, you can speculate on Kevin Plank again. UAA stock is a buy.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB.