Under Armour Inc (NYSE:UAA, NYSE:UA) stock has become a bit of a “normal” stock over the past few months. A series of disastrous earnings reports sent UAA stock plunging from $47 to $20 in less than a year. But, UAA stock has stabilized since early February, generally trading around $20, save for a short-lived pop earlier this month.
The range-bound trading in UAA stock makes some sense. Since an ugly Q4 earnings report in late January tanked the stock, there’s been a “good news/bad news” feel toward UAA. Expectations for the company — and its growth — have come down, and Under Armour is tackling its problems head-on. At the same time, neither the apparel nor the sneaker industries look all that healthy, and external factors have weighed on UAA stock over the past few months.
The problem for Under Armour, however, is that even after a long, steep decline, it’s still not priced for much in the way of bad news. UAA still trades at a 40x multiple to next year’s consensus EPS estimates. That seems far too aggressive and implies that UAA stock should have another leg down.
The Good News for Under Armour
Much of the good news for Under Armour reflects that of Under Armour stock: it’s getting back to normal. Q1 earnings were solid, albeit not spectacular. A modest, but better-than-expected, loss in Q1 led UAA stock to rally after the report, though it would soon give the gains back. Under Armour still expects full-year revenue to increase 10%+, though profits are guided to fall year over year.
Rollouts at Kohl’s Corporation (NYSE:KSS) and DSW Inc. (NYSE:DSW) are going well (in fact, better than I expected). Kohl’s called out strength from Under Armour merchandise on its Q1 call. Both chains are providing new distribution points for Under Armour after the bankruptcy of The Sports Authority last year.
Under Armour star Stephen Curry won the NBA title, and even the Under Armour-sponsored Maryland lacrosse team won the NCAA championship. From a public awareness standpoint, at least, Under Armour certainly is closing the gap with key rivals Nike Inc (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY).
Again, there’s a sense of normalcy around Under Armour that simply wasn’t there during 2016, in particular. 2017 will be a bit of a reset year, as even UAA bulls admit. But, Under Armour seems to be laying the groundwork to re-start growth for 2018 and beyond. And, that growth could allow UAA stock to grow into a still-high valuation.
The Problems for UAA Stock
The key problem for UAA stock is that things like “stable” and “normal” don’t support $20+, let alone $25+. Investors may grant Under Armour 2017 as a year to regroup. But, starting in 2018, Under Armour profit needs to start growing again — and sharply — to support even the current valuation of UAA stock.
And, there are a number of reasons to question whether that growth can come. Most notably, Under Armour’s industries don’t look all that healthy. While The Sports Authority went out of business, retailers like Dicks Sporting Goods Inc (NYSE:DKS) and Hibbett Sports, Inc. (NASDAQ:HIBB) are struggling. HIBB trades at a multi-year low, and DKS is close to it.
Meanwhile, competition from Nike and Adidas is fierce, particularly with the continued renaissance of Under Armour’s German peer. Nike continues to emphasize direct-to-consumer sales. Its reported partnership with Amazon.com, Inc. (NASDAQ:AMZN) sent UAA stock down almost 4%, and with good reason, too.
In men’s and sneakers, then, Under Armour is dealing with two tough (and larger) competitors. It wants to pivot into women’s, but Lululemon Athletica inc. (NASDAQ:LULU) has a solid grip on that market.
Neither end market seems all that healthy, and margins across the space are tumbling. NKE stock was the Dow’s worst performer in 2016 and, as of late April, UAA stock was the second-worst performer in the S&P 500, behind only Frontier Communications Corp (NASDAQ:FTR).
It’s simply not a beneficial environment for a growth stock — and that, combined with a high valuation, seems like it should put a ceiling on UAA stock.
UAA Stock Is Still Expensive
Putting it all together, the road to upside for UAA stock seems difficult. It needs to execute better than it has. It needs its end markets to improve, despite the fact that retailers are increasing promotions, and despite Nike’s multi-year plan to grow share by selling directly to consumers (which itself should improve Nike’s pricing).
With UAA stock at 40x EPS, against low-20s multiples for NKE and ADDYY, Under Armour earnings need to double to support the current stock price. That’s a big — and multi-year — move, and it still seems too much to ask.
For UAA stock, a lot has to go right and there simply isn’t enough evidence to assume the breaks will go Under Armour’s way. Even if they do, at the current valuation, UAA stock may not even have that much upside after all.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
