Categorized | Featured, Short Ideas

Under Armour – Fourth and Long

UA LogoIt’s do or die time for Under Armour Inc. (UA).  As football season kicks into high gear, the specialty sports apparel company must prove to investors that growth is still on track.  At stake is not only the company’s reputation, but also the plight of thousands of shareholders who have bid up the stock in hopes of an improving second half.  The company is a well-oiled machine with a product line unmatched by rivals.  But it remains to be seen whether the brand is strong enough to beat an economic recession fueled by a consumer under pressure.

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The third quarter is by far the most important period for this niche retailer.  As football season kicks off, and athletes begin to fill out their fall wardrobe, Under Armour’s sleek high performance apparel typically begins to fly off retailers shelves.  Management has been very successful in promoting the quality of their wares and developing a robust distribution plan.  In years past some retailers have had extreme difficulty keeping enough product in stock to meet demand.

After successfully launching the company with a product line centered around form fitting shirts pants and fleeces, the company has branched out into other areas and has been working hard to take market share in the footwear category.  Given their popularity with football and baseball athletes, the cleat category was a logical choice.  This expansion has not been without its challenges, but strides have been made to the point where UA now is a respectable challenger to Nike Inc. (NKE) and Reebok.

Kevin Plank is the mastermind behind the cutting edge product line, and at the same time serves as the company’s Chairman and CEO.  A confident leader, Plank appears to fill the leadership role well and has built a solid team of aggressive players who have built an impressive retail giant out of what used to be a single product shop.

Kevin Plank, Chairman & CEO Under Armor (UA)We have a powerful brand that resonates with consumers, a growth platform with enormous long-term opportunity, and a strengthening balance sheet. In 2009, we will continue to make key investments in our growth drivers, increase the level of expertise of our team, and become better operators. ~Kevin Plank, Chairman & CEO

Sound Counsel Investment AdvisorsUnfortunately, while I have the utmost respect for the company (and wish I was enough of an athlete to merit wearing their gear), I believe the challenges of a weak consumer will catch investors off-guard and likely send the stock significantly lower.  Despite a rise in the broad stock market, and improving investor sentiment, the mood on main street is still relatively cautious. Unemployment and underemployment continue to weigh on the American public, and the trends in retail are for consumers to shift to lower quality, lower price brands – certainly not a UA friendly move.

Despite a cautious tone on the US consumer, management issued guidance for 2009 and expects to see earnings come in between $0.80 and  $0.82 for this year.  Analysts who are brave enough to venture a guess for next year see the company earning 94 cents per share which theoretically represents a 16% increase over the prior yearr.  But despite the cautious outlook by management and analysts, shareholders seem to be much more speculative, paying more than $25 per share as of the close Wednesday.  This multiple of roughly 31 times forward earnings appears irresponsible even considering the company’s strong balance sheet and growth trajectory.

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My advice to investors would be to use UA’s slogan and “protect this house” by avoiding the stock.  There is no need to invest capital in risky opportunities, and it certainly appears that UA could be setting investors up for disappointment.  Based on the growth rate and management’s strong history, I think a multiple of 15 (well above the industry average) would be warranted.  But unfortunately, this would mean a stock price close to $12 which would mean significant losses for current investors.    Aggressive traders could consider the October $25 puts which carry a significant premium but could yield a strong return if the stock begins falling sharply.

UA Chart 3

FD: Author does not have a position in UA

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Under Armour – Fourth and Long

4 Comments For This Post

  1. Jerry Song Says:

    I think you missed brand value in this equation. Would you think larger competitor would like to pay $2 billion to purchase this upstart? I bet so if UA management would like it to be sold. My other holding in Omniture just got bought at 1.8 billion. If you look at P/E in that firm, UA is not expensive at all.

  2. Stock Market Crash Info Says:

    Interestingly, everyone’s predicting that the recession is over. If that’s true, premium sports apparel should be back in vogue. If you observed, after the talk about recession ending became popular these days, Walmart stock is kind of stagnating around 50, but other retailers – Macy’s, Kohl’s, Target, JCPenney etc – are going higher in stock prices. UA would be in the non-walmart crowd, hence should do very well in a non-recession economic setup. Agree that playing with some put options wouldn’t hurt, as you would lose just the premium in the worst case.

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