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3 Reasons to Buy Under Armour Stock on Weakness

The shares of Under Armour (NYSE:UAA) spiraled to their lowest levels since 2011 after the athletic apparel company reported awful first-quarter numbers this month. UAA stock is trading today at $7.40. Three months ago, it was a $20 stock.

The plunge of Under Armour ‘s stock makes sense. The novel coronavirus pandemic has brought the global economy to a screeching halt. Consumer discretionary spending has fallen off a cliff. Under Armour’s sales have fallen off a cliff, too, while its inventory levels have ballooned. As a result, its gross margins look poised to be weak for the foreseeable future.

Against that backdrop, it’s no surprise that UAA stock has plunged.

But at its current levels, Under Armour stock actually looks compelling as a contrarian, “buy the dip” investment. There are three main reasons for that conclusion:

  1. Under Armour’s fundamentals are awful today, but they will only improve in the coming months and quarters as the U.S. and global economies gradually re-open and consumer activity normalizes.
  2. Under Armour’s stock is significantly undervalued at its current levels, assuming the company fixes its brand identity issues and maintains its position as one of the top four athletic apparel brands in the world.
  3. UAA stock is also significantly oversold, so it can sharply rally in the coming months.

Overall, then, I think investors should buy the shares on weakness. The firm’s results may be choppy in the near-term. But it can deliver huge potential rewards for investors in the long-term.

The Company’s Fundamentals Will Improve

Under Armour’s fundamentals are awful today.

Coming into the coronavirus crisis, Under Armour was one of the weaker brands in the non-cyclical-growth athletic apparel space. Because the firm decided to double down on performance apparel and completely missed the lifestyle/athleisure boat, Under Armour has lost both relevance and market share over the past several years, leading to sluggish revenue and profit growth trends.

Those sluggish growth trends are sharply decelerating now, amid physical store closures across the world and rapidly slowing consumer discretionary spending. In Q1, Under Armour reported a 22% year-over-year revenue decline, paced by a 28% drop of its North America revenues and an 11% tumble of its international revenues And, as its margins dropped, it reported a wide loss, versus its profit in the same quarter a year earlier.

That’s bad. But it’s also rock bottom. Things will only get better.

The global economy began gradually reopening in May. Such re-opening efforts will accelerate throughout June and July. As they do — and as the news flow surrounding the virus continues to improve (i.e. less deaths, more testing, more treatments, and favorable vaccine progress) — consumers will regain confidence. Consumer spending will pick back up. Under Armour’s stores will re-open. And its growth trends will rebound.

As the company’s growth trends improve, UAA stock will climb.

The Stock’s Valuation Is Attractive

At its current levels, the valuation of UAA stock is quite attractive, assuming the brand can fix its current identity issue.

Under Armour is the wrong company in the right space. The athletic apparel market — supported by consumers’ increasing desire to be fit, active, and healthy — will continue to generate high growth for the next several years. But Under Armour has executed poorly in this market, leading this brand to be the eyesore of an otherwise attractive industry.

Under Armour will likely fix its brand identity issue in the coming years. Given its elevated inventory levels, Under Armour won’t be able to introduce many new products this year.

But management appears committed to significantly reducing the firm’s  inventory levels. That will kill its 2020 gross margins, but pave the path for new product launches in 2021. Those should help the company reconfigure its product portfolio to be more relevant to today’s consumers and regain its footing in the athletic apparel market.

Thereafter, I think the company can grow in-line with the sector. That means 3%-5% revenue growth per year, alongside gradually improving gross margins and some positive operating leverage due to cost-cutting initiatives.

Under those conditions, Under Armour’s 2025 earnings per share could be about 75 cents. Based on a forward price-earnings multiple of 20, which is the average medium-term multiple for the consumer discretionary sector,  that implies a 2024 price target for UAA stock of $15.

Discounted back by 10% per year, that equates to a 2020 price target of $10.25. That’s nearly 40% above the stock’s current level.

The Stock Is Technically Oversold

The 200-day moving average for UAA stock sits at $17. That means the shares are trading about 60% below their 200-day moving average.

That’s as oversold as this stock has ever been. Even during the financial crisis, Under Armour’s stock didn’t drop this far below its 200-day moving average.

A plunge of this magnitude would make sense if Under Armour was going out of business or if the company’s growth trends were going to be depressed for several years. But I don’t see either of those things happening.

With roughly $1 billion of cash on its balance sheet, Under Armour has more than enough resources to weather the current downturn. And, considering the company’s position in the non-cyclical-growth athletic apparel market, it’s tough to see Under Armour reporting negative revenue and profit growth for the next few years.

All in all, then, the selloff of UAA stock simply seems overdone, given that it is a formidable company which will bounce back in 2021.

The Bottom Line on UAA Stock

Under Armour is in trouble. There’s no denying that obvious fact. Consumers aren’t buying athletic apparel right now and even if they were, they likely wouldn’t be buying much of Under Armour’s clothes.

But this feels like rock bottom for Under Armour.

In the coming months and quarters, the economy will gradually re-open. Consumer activity will normalize. Athletic apparel sales will rebound. Under Armour’s sales and UAA stock will follow suit.

So I think playing the contrarian is the right move at this point. Don’t write off Under Armour as dead. Instead, buy the shares on weakness.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he may initiate a long position in UAA within the next 72 hours. 

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