The Next Nike

Under Armour (UA) is goign to be the next Nike, and investors know it, pushing the stock up to 92 times earnings. Yes the P/E is almost 100 even as profit growth has been negative the past two qtrs as the company has spent to acquire fitness tracking devices and their social networks.

What was once primarily a mens apparel company with an edge on its competition because the fabric it used whisked the sweat away from your body, Under Armour is now successfully expanding into footwear, womans apparel, and overseas markets.  Here’s a quick rundown of Under Armour’s growth:

• Sales grew 29% last qtr, the 21st consecutive qtr of +20% revenue growth.
• International sales is where the future lies, and the main reason the stock’s sky-high. Last quarter, sales overseas jumped 93%, but still only account for 11% of sales overall, up from 9% a couple qtrs ago.
• Footwear sales jumped 40% last quarter. Under Armour introduced running and basketball shoes in 2014 and also added to its training, golf and outdoor lines. The company has licensing agreements with two of the top athletes in their sports: in basketball NBA MVP and Finals Champion Stephen Curry and in golf Masters winner Jordan Spieth.
• Direct-to-consumer sales (online sales) increased 33% last qtr and accounted for 32% of sales. Last qtr, Basketball traffic was up 300% year-over-year. 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 building out bigger and better outlet stores, with more apparel, accessories and footwear, with the following 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 25%, up from 22% around 6 months ago. Decent growth, but one would think sales were growing 50% considering the 92 P/E. The P/E was 53 when I looked at the stock in January, and 77 in April.

The stock market is currently taking a few select growth stocks up to the stratosphere. Value stocks are out as the strong dollar has hurt sales and profit growth with many Blue Chips. This trend might continue until 2016.

One Year Chart

Profit growth went negative earlier in the year due to UA acquiring companies to expand into fitness social networks and electronic fitness tracking devices. Growth is expected to pick back up two qtrs from now.

Note 2008 profits were down. Shoe and apparel manufacturers can be negatively affected by poor economies (which is the main reason I passed on UA). This is often priced into a stock, the P/E gets punished for this. But right now greed is overtaking fear and Under Armour is sky-high. Look at the ten-year chart below for a perfect example of a dangerous parabolic move.

Fair Value

My Fair Value on this stock is 45x earnings. That would be a stock price of $49, half what the stock is selling for now. I feel UA could go through a long period — perhaps two years — when the stock doesn’t go anywhere as the earnings catch up to the stock price.

Sharek’s Take

Under Armour has gone parabolic as investors don’t think this could be the next Nike, they know it. But the stock’s shot to the sky and now this is a risky investment for new investors. Yes UA is an amazing company clicking on all cylinders but I have to be prudent and wait for a correction to buy clients in.