High Growth for High Price

Under Armour (UA) is one of the top high growth stocks we don’t already own, and the reason we don’t own it is UA’s high price. At $65 the stock sells for 53x earnings. That’s high for an apparel stock. But UA isn’t a regular apparel stock. The company has numerous growth opportunities:

• International sales are really where Under Armour has a bright future. Last quarter, sales overseas jumped 94%, but still only account for 9% of sales. Think about that. 91% of sales come from the U.S.
• Footwear sales jumped 50% last quarter, and account for 17% of sales. Under Armour introduced running and basketball shoes last quarter, and also added to its training, golf and outdoor lines as it tries to be the next Nike.
• Direct-to-comsumer sales (online sales) increased 35% last qtr and accounted for 26% of sales. Here’s the percentage of direct-to-consumer sales from 2005-2013: 6%, 8%, 11%, 14%, 18%, 23%, 27%, 29%, 30%. UA recently launched local E-commerce sites in the UK, Germany and France .
• Under Armour is putting out bigger and better outlet stores, with more apperal, accessories and footwear, here’s the expansion plans (Source: UA’s Raymond James Institutional Investor Conference march 2014):
  2010 54 stores avg sq ft 4,900 per store
  2013 117 stores avg sq ft 5,700 per store 
  2016 141 stores avg sq ft 7,700 per store

The company expects 2015 revenue to rise 22%. In 2014 revenue was expected to climb 22% to 23%, and is now expected to increase 30% (UA reports around the end of this month). Profits are expected to grow 25% in 2014, slightly better than the 23% in 2013. And that’s what gets me is how can this stock garner a 53 P/E with twenty-something percent profit growth?

One Year Chart

What’s up ahead looks good. Profit are expected to rise 30% NxtQtr and 50% 2QtrsOut. The Earnings Table shows profits are expected to rise 50% three qtrs out as well. 50% growth for two consecutive quarters, maybe that’s why UA has a 53 P/E? 

Still, this is a twenty-something percent grower long-term, isn’t it? UA has been growing 30% per year, and as we saw earlier tells analysts it will have 22% growth then put out 30% growth. We need to assume this is a 30% grower.

I do want to point out UA has given investors opportunities to get in on a dip. Note the correction from $62 to $45 (-27%) last Spring. We need another one of those to get in.

Fair Value

My Fair Value on this stock is 35 times earnings, which gives me a 2015 Fair Value of $42. I’m writing this article today as the Dow is down 200 and may be going into a correction. Still, UA is down less than a dollar. It needs to have a correction for me to buy in.

Sharek’s Take

Under Armour has enormous potential Internationally, and should be able to grow for years to come. International sales are only 9% of revenue right now, compared to 56% for Nike, which did did $7 billion in sales last qtr, compared to $1 billion for Under Armour. There’s great opportunity ahead, but investors already know this and have pushed the price up so high it’s too expensive. It’s really so high that I imagine the stock could be around this price two years from now.

Under Armour is at the top of my radar, but we need a serious correction to get in. My target price is $42.