Athletic apparel company Under Armour (NYSE:UAA) reported second quarter earnings before the bell on Thursday, 7/26. The numbers were decent (revenue beat, earnings in-line, revenue guide hiked, and earnings guide maintained), and Under Armour stock rose slightly in response.

But, the quarter and subsequent price reaction mostly affirms that around $20, Under Armour is stuck in no man’s land.

In the big picture, Under Armour is a company that is gradually improving its financials, but that also doesn’t have huge growth prospects due to limited brand interest, rising competition, and dilutive sales. Thus, this is a company with good, but not great, growth prospects over the next several years.

In the low $20’s, Under Armour stock is priced slightly aggressively considering that reality. But, sentiment and momentum remain in the hands of the bulls. Thus, a slightly aggressive valuation could persist.

That being said, anything above current levels is overly aggressive and unsustainable. As such, I think Under Armour stock is stuck in no man’s land. Fundamentals prevent higher prices. Sentiment prevents lower prices.

Word of caution: sentiment flips faster that fundamentals. Thus, the risk-reward skews towards the downside. But, not to an extreme that warrants a short position.

Here’s a deeper look.

Under Armour’s Outlook Is Improving

The Under Armour growth narrative is unarguably improving, and those improvements continued in the second quarter. Revenues rose 7% in constant-currency, the best mark this company has reported in several quarters.

Moreover, North America revenues were actually up in the quarter (+1%), which is a sharp inflection from persistent declines over the past several quarters. Perhaps more important, international revenue growth actually accelerated sequentially (+24%, versus +19% in Q1), ending a multi-quarter streak of international revenue growth deceleration.

Because of these improved results, management hiked their full-year revenue guide from low single-digit growth to 3-4% growth, while saying North America revenues had a chance to decline at just a low single-digit rate (versus mid-single digit declines in the prior guide).

Overall, the top-line narrative at Under Armour is improving. North America revenues are stabilizing, and international revenue growth re-accelerated. That combination implies a brighter future ahead for Under Armour.

Challenges Remain at Under Armour

Despite those top-line improvements, challenges still remain at Under Armour.

This is supposed to be the big bounce-back year, and sales were up just 7% last quarter. Meanwhile, North America sales growth was 1%. Yes, it is good to see positive growth in those segments. But, single-digit growth is still anemic, and doesn’t exactly imply big growth ahead.

Meanwhile, international revenue growth accelerated sequentially. But, it is still down year-over-year. In the year ago quarter, international revenues rose more than 50%. Thus, the slowing international growth narrative remains in-tact.

On the margin side of things, there are a lot of concerns. Gross margins continue to fall back, mostly due to the fact that Under Armour is reinvigorating North American sales growth by selling into lower price distribution channels.

The operating expense rate is on the rise as expense growth is outpacing sales growth. And, the company’s adjusted operating loss was $20 million in Q2, versus a $5 million operating loss last year.

The margin problems are mostly the result of increased competition causing Under Armour to grow sales through dilutive distribution channels, and invest big into product and marketing in order to effectively compete.

Those headwinds will remain into the foreseeable future.

Under Armour Stock Is Overvalued

Overall, this is a company with mild growth prospects in both its North America and international business segments, and mild margin expansion potential. That means that Under Armour isn’t much more than a 5% revenue growth company with mitigated margin drivers.

That combination leads me to believe that Under Armour can net around $1.50 in earnings per share in 5 years. Nike historically trades around 25X forward earnings. But, Under Armour stock doesn’t deserve that type of multiple because Under Amour isn’t Nike. As such, a growth-average multiple of 20X forward earnings feels more appropriate.

A 20X forward multiple on $1.50 implies a four-year forward price target of $30. Discounted back by 10% per year, that equates to a year-end price target in the low $20’s.

Bottom Line on Under Armour Stock

Under Armour’s second quarter earnings report was a mixed bag. That mixed bag affirms that at present levels, Under Armour stock is stuck in neutral.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.