Under Armour Inc (NYSE:UAA, NYSE:UA) went down as one of the worst-performing stocks in the S&P 500 last year. After losing half its value, the company is now in the precarious position of trying to rescue a sinking ship that has several major holes.
The biggest issue I have with UAA is its lack of sales growth — it’s a paltry 4.8% over the last 12 months. A lot of this has to do with increased competition from European brands like Adidas AG (ADR) (OTCMKTS:ADDYY) and Puma, both of which are making a comeback and eating into the market share of Under Armour and category leader Nike Inc (NYSE:NKE).
Operating margins are also a problem. The company’s 12-month operating margin is just 4.3% of sales, much smaller than NKE’s 13% and ADDYY’s 9%. So even if sales do start to pick up in the near term, the amount of money flowing to the bottom line isn’t enough to turn things around.
The reason for the low operating margins is UAA’s product mix. They’ve also been affected by the company having to lower the prices on its goods through discount retailers. The problem here is that companies that opt to increase sales through lower margins often have a hard time making the switch back to higher-priced items, as consumers are now accustomed to being able to purchase their products on sale.
More of the Same in 2018 for UAA Stock
The turn of the calendar hasn’t done anything to alleviate the stress.
Adding insult to injury, research firms Macquarie and Susquehanna downgraded the stock citing some of the same concerns we just talked about, and they also lowered their full-year earnings estimates. As of today, the consensus has Under Armour earning 24 cents a share this year, which represents 26% over 2017. Even if the company can match this, it is still a long way from the 53 cents a share it earned back in 2015.
Based on the 2018 numbers, UAA is trading with a price-to-earnings ratio of 63.
From a chart perspective, this stock remains as ugly as it was a few months ago. Yes, it has managed to come back 30% from its November low, but just as stocks don’t go straight up, they also don’t go straight down. The rally was likely the result of short-term traders trying to play a dead cat bounce — and they got what they were looking for.
In the end, UAA remains a stock I am staying away from. There are so many stronger opportunities in the apparel space right now, specifically in NexGen companies like Adidas that are taking away market share from the old stalwarts.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.