Even after Friday night’s Cleveland victory, it appears as though the Golden State Warriors are on the verge of taking home their second NBA championship in three years. The team’s biggest star, two-time MVP Steph Curry, has played a major role in this year’s success, and he’s also helped give one stock a much needed boost recently — Under Armour Inc (NYSE:UAA, NYSE:UA)
Curry is one of the biggest names on the roster of athletes that endorse Under Armour, and having success on the NBA’s biggest stage is no doubt good for UAA stock.
The question now is whether another championship is enough to revive UAA’s share price for the long term.
Unfortunately for Under Amour, I don’t think it is. Let’s talk about why I’m staying away right now.
Under Armour Just Can’t Win
We’ll start with the technicals. As you can see in the chart below, the stock has been rallying recently and has climbed 16% off the multi-year low it hit in May. But now it’s approaching a significant resistance level (the black line) that I suspect will prove difficult to break through.
Click to Enlarge A confirmed move above near-term resistance that’s being created by the recent high at $22.34 and the bottom of the late-January gap at $22.16 would be the first bullish signal this chart has seen in over a year, and I’d have to re-analyze my stance here should that occur.
I suspect it’s more likely that UAA’s rally will be halted once it reaches those levels, however, as it’s fluctuated between a 2% and 4% gain on Monday’s trek higher.
I also have two major issues with the company from a fundamental perspective. The first is slowing sales. In 2007, Under Armour saw annual sales of less than $500 million and this year they are expected to reach $5.35 billion.
There’s no denying that’s fantastic growth, but after sales increased 29% in 2015 they grew by just 22% in 2016. And this year sales are estimated to grow just 11%. Wall Street wants to see expanding growth, not declining numbers.
Bottom Line on UAA Stock
Under Armour has also struggled with operating margins as a result of a few factors. First, the low-margin footwear business has expanded while the higher-margin apparel division has actually declined. And second, the company’s connected fitness division — which was created to take on Fitbit Inc (NYSE:FIT) — has been a failure and caused UAA to lose money in the previous quarter.
To increase sales, management has spent big money signing new athletes to endorsement and marketing campaigns, and UAA is also spending more to develop new products that have yet to come to fruition.
The end result? A steady decline of operating margins for a company that has also seen its sales slow. This isn’t a good mix, so I’m staying away until I see improvement on its fundamentals and confirmation on its technicals should Monday’s gains stick.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.
