For the past two years, calling a bottom in Under Armour Inc (NYSE:UAA) stock has been a losing man’s game. It will remain so until UAA stock comes down a lot more.
The valuation on UAA stock remains unreasonably rich. The brand is showing no signs of executing a turnaround strategy. Competitors Nike Inc (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY) are starting to aggressively up their games in the North American market, which is where Under Armour gets more than 75% of its revenues.
That is a deadly combination for UAA stock. Over the next several months, barring some unforeseen catalyst, UAA stock will simply continue to grind lower.
Under Armour’s Popularity Continues To Fall
The UAA brand isn’t what it used to be two years ago. In 2015, Under Armour was a formidable competitor to Nike and Adidas. Today, Under Armour has fallen way behind Nike and Adidas in terms of popularity and market share.
This isn’t going to change anytime soon. Under Armour simply doesn’t have any exciting products on the market that athletes want to wear. To understand this, just do simple channel checks on the websites of Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL).
Foot Locker’s best-selling Men’s Basketball shoe list is dominated by Nike and Jordan. Under Armour’s brand new Curry 4 is a few scrolls down. The Curry 4 is doing better at Finish Line, but the top-selling Men’s Basketball shoe list there is still dominated by Nike and Jordan. It’s worth noting that the Curry 4 just launched globally, so if things were going well on the demand side for Under Armour, it’d be the top-selling Men’s Basketball shoe everywhere.
Meanwhile, you’d be hard-pressed to find an Under Armour shoe on Foot Locker’s best-selling Men’s Casual shoe list. Same with Finish Line’s best-selling Men’s Casual shoe list.
The running picture is equally ugly for Under Armour. Adidas and Nike dominate Foot Locker’s best-selling Men’s Running shoe list. Under Armour, again, is nowhere to be found. The first Under Armour shoe on Finish Line’s best-selling Men’s Running shoe list is a few scrolls down.
On to apparel: Under Armour shirts aren’t too popular at Foot Locker, while they clearly lag Nike and Jordan shirts at Finish Line. Same on the Men’s Hoodie and Sweatshirt front.
All in all, it is clear to see that an Under Armour turnaround isn’t going to happen anytime soon. When Under Armour was an iconic brand back in 2015, its products were found everywhere on the aforementioned best-selling lists. Today, they aren’t found anywhere.
UAA Stock Is Still Richly Valued
This falling popularity, which is behind a 12% decline in UAA North America revenues last quarter, would be “okay” if UAA stock was priced for this compression to continue.
But it is not.
UAA stock trades at 62.5x this year’s earnings for low single-digit revenue growth and 30% earnings growth over the next 2 years. That is a shockingly high price-to-earnings/growth (PEG) ratio of 2.1.
Meanwhile, NKE stock trades at 24.2x this year’s earnings for mid single-digit revenue growth at 16% earnings growth over the next 2 years. That is a more reasonable PEG ratio of 1.5.
There is no reason UAA stock should be more richly valued on a PEG basis than NKE. Due to the company’s size and track record, NKE’s long-term earnings growth trajectory is far more stable and secure than UAA’s long-term earnings growth trajectory. That stability and security should be awarded a premium valuation.
Nonetheless, if UAA’s PEG ratio comes down to match NKE, then that would imply a “fair” price-to-earnings multiple of 45. A 45x multiple on this year’s earnings estimate of $0.20 implies a fair value of $9.
Bottom Line on UAA Stock
I’m not completely throwing in the towel on UAA stock. There will be a time to buy this name because the company does have value.
But the price to buy is $9, nearly 30% below the current market price.
Barring an unforeseen catalyst causing a turnaround in the brand, I’m avoiding UAA stock until it breaks into single-digit territory.
As of this writing, Luke Lango was long NKE.
