2 Big Reasons Why Under Armour Stock Could Rebound In 2020

UAA stock will retake the $20 level in 2020

So far, 2019 has been the best of times and the worst of times for athletic apparel brand Under Armour (NYSE:UAA). In the first half of the year, Under Armour stock popped nearly 60% amid stabilizing revenue growth trends and improving margin expansion trends, as well as a lack of negative headlines.

2 Big Reasons Why Under Armour Stock Could Rebound In 2020
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In the second half of 2019, though, Under Armour stock has shed more than 30%. Revenue growth trends stopped stabilizing and started deteriorating again. At the same time, its margins, which had been improving, started to flatten out.

The announcement of SEC and DOJ probes into the company’s accounting practices didn’t help. Nor did the departure of multiple top executive, including its former CEO, Kevin Planck.

But, as we come into the end of the 2019,  this brutal selloff of UAA stock may be ending.

Specifically, there are two two reasons to believe that Under Armour stock can and will rebound  in 2020. As such, UAA stock looks compelling on recent weakness. I fully expect shares to bounce back above $20 in 2020.

Under Armour Stock Is Undervalued

I’ve been bearish on UAA stock several times over the past few years, so I’m well aware of what’s wrong with the Under Armour growth narrative.

For all intents and purposes, Under Armour is the ugly duckling in the athletic apparel market. Management missed the boat on the athleisure trend, and instead doubled down on performance apparel. They also aggressively shipped product into off-price channels to temporarily boost sales, which dented consumer perception of the brand. Their athlete portfolio has taken a huge hit, too, with the brand’s most notable athlete, NBA superstar Stephen Curry, hurt and sidelined for a lengthy stretch of the year.

Thus, while peers Nike (NYSE:NKE), Adidas (OTCMKTS:ADDYY) and Lululemon (NASDAQ:LULU) have leveraged secular athletic apparel adoption tailwinds to drive huge sales growth at favorable margins, Under Armour has not.

But, at the end of the day, Under Armour is still growing, because they are essentially one of a handful of relevant brands in the athletic apparel market. That market is projected to grow at a 5%-plus clip into 2025. Even if Under Armour steadily loses share in that market, we are still talking about a 2%-3% revenue grower here.

The company’s gross margins are in the mid 40% range. That’s below the apparel retail average of 50%, so gross margins have room to improve. Management is also moderating expense growth. Assuming this persists, Under Armour has an opportunity to drive its operating expense rate down.

Assuming all those things happen — and those aren’t aggressive assumptions — then Under Armour could produce roughly $1.50 in earnings per share by 2025, according to my modeling. Further assuming a forward price-earnings multiple of 21 (about average for consumer discretionary stocks) and a 10% annual discount rate, that equates to a 2020 price target for Under Armour stock of $20-plus.

Positive Developments Will Push Shares Higher

Forthcoming positive developments in the UAA growth narrative should propel Under Armour stock higher in 2020.

First, Under Armour’s revenue growth trends should improve. Broadly speaking, thanks to potential easing of U.S.-China trade tensions, the global economic outlook is significantly improving. This should persist into 2020. As it does, recession fears will disappear, and consumer spending will pick up. Naturally, this will create a rising tide which will lift all retail growth rates, Under Armour’s included.

Second, Under Armour’s margin trends should improve, too. That is, gross margins have been trending just fine. The problem has been that positive operating leverage, has turned into negative operating leverage, as Under Armour’s revenue growth rates have slowed. Those revenue growth rates will pick back up in 2020. As they do, negative operating leverage will go positive again, and Under Armour’s margin expansion trends will improve.

Third, investor perception of Under Armour stock will improve. This is due to two things. On one end, it seems the market overreacted to news of several-years-old SEC and DOJ accounting probes. The most recent news here is that these probes are most likely in their latter stages, meaning that a resolution could be reached in 2020. Such a resolution will provide a sentiment boost to Under Armour stock. On the other end, easing U.S.-China trade tensions will bring money back into athletic apparel names that have been an the epicenter of the trade war.

All in all, then, there are multiple catalysts on the horizon which could breathe life back into beaten-up and undervalued Under Armour stock.

Bottom Line on UAA Stock

I’ve been bearish on Under Armour stock many times before. But, I think that it is time to put on the bull’s hat. Sentiment surrounding this company has become too bearish, and the valuation has become too anemic. Further, there are multiple upside catalysts on the horizon.

As such, UAA stock is well positioned for a big rebound in 2020.

As of this writing, Luke Lango was long UAA, NKE, and LULU. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/2-big-reasons-why-under-armour-stock-could-rebound/.

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