By now, it is common knowledge among market participants that Black Friday was surprisingly good for most retailers. E-commerce sales continued to jump higher, while brick-and-mortar declines finally moderated. One boat being left out of the recent rally is athletic apparel company Under Armour Inc (NYSE:UAA). That is a sure-fire sign that UAA stock isn’t going to trade higher anytime soon.
Consequently, I say sell here and don’t buy until this stock collapses much further. Here’s why.
UAA Stock Is A “Failure To Launch” Situation
Going into Black Friday, Under Armour stock lost more than half its value in 2017, similar to the 40% decline for Macy’s Inc (NYSE:M) and the 60% decline for J C Penney Company Inc (NYSE:JCP). Since Black Friday, Macy’s stock has surged 20% higher while even the much maligned JCP stock is up more than 2%. The SPDR S&P Retail (ETF) (NYSEARCA:XRT) is up better than 6%.
Under Armour stock? It is actually down about a percent. That decline is also amid the Senate passing the GOP tax bill, which shot a bunch of a high tax-paying retailers materially higher. Under Armour, with an effective tax rate of 34% last year, should’ve shot higher, too.
But it didn’t. This is a “failure to launch” situation. By now, the writing is on the wall. This isn’t some overly beaten up name in athletic retail like Dicks Sporting Goods Inc (NYSE:DKS) and Foot Locker, Inc. (NYSE:FL).
Tax reform and positive Black Friday numbers have carried those stocks roughly 6% higher since Black Friday. Why didn’t the same thing happen to UAA? Because UAA is still overvalued. Don’t let the 50%-plus year-to-date decline fool you.Under Armour still trades at nearly 70-times this year’s earnings estimate.
DKS stock trades at 10x this year’s earnings. FL stock trades at 11x this year’s earnings.
UAA Stock Isn’t a Buy Until It Is Way Cheaper
UAA’s failure to rally on two bits of good news means that the stock is very troubled, and very overvalued. Under Armour’s day in the sun is over. This used to be a brand with huge and growing consumer demand, but the company’s athlete portfolio has failed recently.
NBA star Stephen Curry has taken a backseat to teammate Kevin Durant, while golf sensation Jordan Spieth has fallen off the map, and the brand hasn’t added any notable athletes recently. As those athletes faded from the spotlight, so too did the Under Armour brand.
It will be a long and challenging road back to the mountain top because the biggest player in this space has suddenly decided to aggressively grow its market share. Athletic retail giant Nike Inc (NYSE:NKE) is starting to put on the full-court press in this space.
NKE is aggressively attempting to eat market share through streamlining investments, accelerating product innovation, and pushing direct sales. Under Armour, already on the decline, doesn’t stand a chance against this intensified competition.
Overall, then, UAA is a company with low revenue growth prospects and good margin growth prospects. All together, the Street is expecting 30% earnings growth per year over the next 2 years.Under Armour trades at 70x this year’s earnings estimate (a 130% premium to growth).
NKE is expected to grow earnings around 16% per year over the next 2 years. NKE stock trades at 25.9x this year’s earnings estimate (a 60% premium to growth). Is there any reason why UAA stock should trade at more than twice the growth premium of NKE stock? No.
Bottom Line on UAA Stock
Calling a bottom in this stock over the past two years has been a losing man’s game. It will remain so into the foreseeable future. This stock is very troubled and very overvalued.
UAA’s failure to rally in any considerable way following strong Black Friday shopping numbers and positive tax reform progress is a major warning sign about limited upside. Bottom line: stay away from UAA stock until it is at least as cheap as NKE stock.
As of this writing, Luke Lango was long NKE, DKS, FL, and M.
