With Under Armour, Don’t Sweat, Buy It


Under Armor (UAA) stock has seen four buy upgrades since the start of the year, the most recent from Morgan Stanley (MS) on Wednesday. Since November’s strong earnings report, UAA has posted a solid 25% pullback and analysts see a buying opportunity.

Under Armor shares have historically traded at a rich valuation, with high growth expectations and a high price-to-earnings multiple. After refocusing on earnings rather than “growth at all costs”, the valuation has compressed and the stock is trading at a reasonable consensus of 24x earnings per share for 2022. Pre-Covid, stocks traded with a multiple of between 35 times and 65 times. Cash flow is at record highs, two years into the new CEO’s term.

MS analyst thinks UA can outperform global activewear peers this year; four factors are cited: lower relative supply chain risk, likelihood of relative outperformance of China sales trends against global peers who may still feel the effects of cotton controversy/boycotts 2021, industry channel verification momentum and likely conservative forecasts and expectations for 2022 giving way to upward revised EPS.

The analyst also thinks the recent weakness in equities may have been caused by holiday weakness in specialty retail. But the analyst argues the weakness is unwarranted and ignores Under Armor’s differentiated model and product exposure. The two largest UA apparel retailers, Dick’s Sporting Goods (DKS) and The TJX Companies (TJX), remained among the strongest retailers.

The BMO analyst, who updated the shares in January, noted that UA had quietly built up a strong cash balance. Over the past five years, cash has increased fivefold to $1.5 billion, now in line with their debt which has grown 50% over that time. With increasing balance sheet flexibility, they calculated that buying back shares with excess cash could hypothetically lead to double-digit EPS growth.

Citi also updated the stock to buy recently. The analyst believes Under Armor is emerging from the pandemic in a much stronger position in North America, with no excess inventory, streamlined distribution channels and a strong product assortment. The analyst also believes UA is gaining ground internationally and the shares are a bargain at around half the enterprise value/earnings before interest, taxes, depreciation and amortization multiple for Lululemon Athletica ( LULU) and Nike (NKE).

Under Armor posted record gross margins last quarter and among the best Q3 margin increases and EPS upgrades in the entire group as the company continues to under-promise and over-deliver. They improved pricing power through brand elevation and streamlined its expense structure through a more efficient operating model. E-commerce and direct-to-consumer have increased significantly since 2019.

The return of team sports and other recreational sporting events was a tailwind somewhat offset by ongoing Covid issues, supply chain bottlenecks and inflation. Although the company will experience its best financial performance this year on record, the full benefits of operational efficiency and improved brand performance are yet to come. Wall Street has yet to jump in on the action, missing that new management has dramatically improved financial performance and business consistency.

UA offers good risk/reward given the steep pullback, continued trading momentum and the stock reasonably priced with a P/E in the mid-20s. Analysts say buying ahead of fourth-quarter earnings quarter and a solid year ahead should not be difficult.

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