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Don’t Assume Under Armour Stock Will Continue to Grow Comfortably

Under Armour stock - Don’t Assume Under Armour Stock Will Continue to Grow Comfortably

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Under Armour (NYSE:UAA, NYSE:UA) stock has seen a strong performance in 2018. Bolstered by sales increases in international markets, Under Armour stock has risen by about 87% from its 52-week low back in February. Analysts such as those at Wells Fargo (NYSE:WFC) have declared that “the worst is over.” As a result, they now rate UAA as a market perform.

However, these increases have also taken the multiples on UAA stock to new highs. Under Armour also operates in a fickle industry where tastes, and by extension profits, can change with the wind.

Due to the competitive nature of this industry, more can go wrong than right by buying UAA at these levels.

Under Armour Stock Has Begun to Recover

Nobody can deny that Under Armour has delivered a stellar performance in 2018. Following earnings in late October, it rose by a stellar 27.7% in one day. UAA has remained range-bound since earnings, but it has held on to those gains. Yet despite this increase, it still trades at less than half of the stock’s all-time high of $52.95 last seen in the fall of 2015.

Investors have bid UAA stock higher due to prospects for international growth. The company expects only 3-4% sales growth in North America. For its international growth, it forecasts sales will grow by 25%.

However, this has taken the forward price-to-earnings (PE) ratio to almost 69. This compares to a forward PE of 24 for Nike (NYSE:NKE) and 31 for Lululemon (NASDAQ:LULU).

In fairness, analysts also project 54.5% profit growth for Under Armour stock next year. This significantly outpaces the growth of its direct peers whose growth remain in the low double-digits. If investors had a reasonable assurance that that could hold, the market could justify such a valuation.

Remaing Threats to Under Armour stock

Still, the high PE also prices UAA stock for perfection, leaving the equity vulnerable if growth falls. Our own Luke Lango expressed concern with the PE, and he may have a point. While revenues outside North America have taken off, international sales make up only 24% of the company’s revenue.

Moreover, for this quarter, revenues actually fell in North America. When one looks at UAA as a whole, overall revenue growth will remain in the single digits even if the company meets expectations on sales increases.

That said, I see a more significant concern with the nature of the industry itself. For all its accolades, clothing remains a fickle, narrow-moat industry.

While I like Under Armour clothing, I cannot say I strongly prefer it to Nike, Adidas (OTCMKTS:ADDYY), or any comparable brand. Also, changes can appear rapidly in this industry without being easily understood. Such swings in fashion and consumer taste can dramatically alter sales projections.

Given UAA’s high sales forecasts outside of North America, any “dramatic” change would more likely come on the downside.

Inevitably, many consumers can also choose off brands with lesser-regarded labels or no label at all. Moreover, some of the growth comes from offshore markets that lack the stronger intellectual property protections seen in North America. All of these factors could dampen sales for UAA and its peers.

The Bottom Line on Under Armour Stock

Under Armour investors understandably want the equity to recover the multi-year highs. However, both profits and market conditions more likely position the stock to fall.

Sales increases have outpaced those of its direct peers. Also, sales in offshore markets have given a glimmer of hope to stockholders who saw UAA lose 75% of its value over two years.

Still, even by the most optimistic projections, long-term growth will probably not support a 69 PE ratio. Moreover, the fickle nature of Under Armour’s narrow-moat industry could turn the tide toward the negative.

The worst may well be over for Under Armour stock. However, until UAA can show that sales growth will not worsen again, investors should probably stay away.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

Article printed from InvestorPlace Media,

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