One of the big surprises this year has been the performance of Under Armour (NYSE:UAA,NYSE:UA) stock.
It’s true that Under Armour stock is still way below the all-time high set in the summer of 2015.Yet Under Armour stock has certainly been a winner in 2018. UAA stock has risen a sizzling 60%, beating out many of the world’s top tech operators like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Actually, UAA stock has done much better than plenty of this year’s initial public offerings!
So what happened? Why has Under Armour stock done so well? Part of the reason is that sentiment toward the name was downright awful. It was also easier for the company to show progress after the bar was set low because of the slumps of its top and bottom lines in 2017.
Restructuring Has Boosted UAA Stock
But CEO Kevin Plank also got serious about restructuring the company’s operations, which needed the attention. For the most part, the rejuvenation of Under Armour stock has been based on cost cutting and realizing efficiencies with inventory.
These moves also appear to be far from over. In September, UA announced that it was laying off 400 employees or 3% of its global workforce.
Under Armour Stock Still Faces Tough Headwinds
While all this is important, the company’s slumbering growth is still a problem. Last quarter, its revenues rose a mere 2% to $1.4 billion. In fact, its North American sales dropped 2% to $1.1 billion. The only silver lining was the company’s international segment, whose top line surged 15%.
The overall sluggish growth should be scary, as Under Armour has shelled out princely sums for sponsorships by superstar athletes. However, some of these stars, like Jordan Spieth and Cam Newton, have been losing their luster. In today’s intensely competitive sports world, the longevity of a superstar is often fleeting.
In the meantime, Under Armour must fight against mammoth competitors like Nike (NYSE:NKE) and Adidas (OTCMKTS:ADDYY). They aren’t afraid to use their resources to engage in an arms race over sponsorships. And it does like those bidding wars have taken a toll on Under Armour and Under Armour stock.
Another issue is that the main advantage of UAA – its expertise in performance sportswear – is no longer as important to consumers. Instead, the trend has moved towards offerings that are fashionable, which plays to the strengths of NKE and ADDYY.
So to pump up its revenue, UAA has been expanding its distribution; for example, it has started selling products to Kohl’s (NYSE:KSS). However, that strategy could lead to excessive discounting which could hurt the brand.
The Bottom Line on Under Armour Stock
Some Wall Street analysts are getting more bullish on Under Armour stock. For example, Wells Fargo (NYSE:WFC) upgraded the shares from “underperform” to “market perform” because of the company’s restructuring initiative. Then there is Baird’s Jonathan Komp, who has put an “outperform” rating on the stock and has a price target of $27, translating to an increase of about 15% from current levels.
Yet despite all this, the valuation of UAA stock is still far from cheap. Note that the forward price-earnings multiple of UAA stock is a sky-high 69. That is definitely steep for a company that is growing at a slow pace. If anything, it seems that investors have already factored in much of the good news, and then some. So it’s probably best to avoid Under Armour stock for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
