Shares of Under Armour (UA) are killing it this year as fundamentals are making investors drool. Although revenue grew a solid 34% last quarter, International sales growth of 80% was really what got everyone’s attention. Still, this is only 8% of total sales, but think of the potential UA has overseas in the future. Could be a Nike story.
And speaking of Nike, Under Armour has not only jumped into shoes successfully (with sales up 34% last qtr), but it’s branching out into different segments just like Nike did a decade ago. UA is pushing into women’s sportswear. Their line includes shoes, workout gear, golf outfits and of course running gear. And a month ago the company made news when it signed Gisele Bundchen as a spokeswoman.
The problem is Under Armour stock is too high. I mean way too high. Last quarter the stock jumped 15% after it reported earnings, and now in the high $60s the stock has a P/E in the 70s.
One Year Chart
Here’s a view of UA as of August 5th. So its been two months. The market’s been down recently, especially last month, yet this stock is still holding its own. When I compiled this data UA was $68 and now its $67. Great stocks usually hold up well (1) during the beginning stages of a correction or (2)during a weak correction. Right now this market looks like the latter.
If we take the +50% profit growth from two qtrs ago and average it with the 0% from LastQtr we get 25%. Then if you look across the bottom it looks like profits are growing around 25% a quarter, right? And you’re having to pay 73x earnings for this stock. Under Armour is way too high.
Another thing is this is a shoe company, and we need good consumer spending for numbers to come in as projected. Notice in 2007 & 2009 that profits fell. Apparel manufacturers are cyclical.
Fair Value
My Fair Value on this stock? Well originally I was thinking 24 times earnings, but now I’m changing that to 35x. I’m thinking more highly of Under Armour now that I’ve had time to think. Also in the Earnings Table notice profits are expected to soar 67% 3QtrsOut 63% 4QtrsOut. Profits are expected to climb at least 20% over the next ten quarters. Still, that means this $68 stock is worth $33.
Sharek’s Take
Under Armour is enamored right now, which is great if you already own the stock. I don’t and am not gonna get in this high. In fact, I think if the stock market goes into a deeper correction then investors will look to sell high P/E stocks like Under Armour first.
View the Earnings Table here.View the Ten Year Chart here. View the Profit History here.
