Is This Stock Overpriced?

Ayush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Athletic apparel maker Under Armour (NYSE: UA) has been under the shadows of its superior competitors for quite some time now, but if you take a look at the company’s quarterly results, you can be sure that the company is trying hard to catch up with its rivals. The results have been overwhelming as the company recorded a robust growth in its margins, beating the analysts’ estimates.

Let’s take a look at the factors that contributed to this growth.

What got Under Armour running?

Under Armour’s total revenue came in at a $454.5 million, signifying an increment of 23%, comfortably beating the consensus estimate of $448.9 million. The hike in top-line was primarily driven by the company’s sturdy performance in the apparel segment. This doesn't come as a surprise, at least not to me, as this is the 15th consecutive time that the company’s revenue in the apparel section has increased by a whopping margin of more than 20%.

This time around, Under Armour recorded an increment of 23% in apparel net revenue, which contributed $310 million to its revenue. The sustained momentum of sales in the apparels segment is a clear indication that the company is playing to its strengths and will continue to do so to achieve long term success. Apart from that, the revenue was also propelled by the increase of sales in the footwear and accessories segment.

The increase in the earnings was even more impressive as Under Armour recorded an augmentation of 165% to $18 million from $7 million in the prior fiscal year. The diluted earnings per share for second quarter were $0.16, thus surpassing the analysts’ estimate of $0.14. The gigantic rise in the net income was a result of Under Armour’s continued innovations across all platforms, which resonated with the requirements of the consumers and created great excitement in the market place.

Plans for the future

Entering into the more lucrative soccer market

The company is expanding its horizons by stepping into the soccer market, which should potentially show good returns.

Under Armour signed a lucrative deal with Tottenham Hotspur, an English soccer club, replacing Puma as the team’s main sponsor. I consider this to be a very good deal as Tottenham Hotspur have gradually climbed their way up from the bottom of the division and now are regarded as one of the powerhouses of England. This gradual rise was accompanied by the increase in the club’s global fan base and this will potentially prove to be a great deal for Under Armour.

The company is also entering into a relationship with the most famous Chilean soccer team called Colo-Colo to mark its arrival in the country’s soccer market. This will definitely boost Under Armour’s sales in Chile.

Global expansion

94% of the company’s revenue is generated from the U.S.A., but the company is now looking to widen its international base as it tries to make its presence more prominent in the global market.

Under Armour’s contract with Canelo Alvarez is helping the company to enhance its business in Mexico, as the boxer is a highly popular figure in the country and recently won a junior middleweight championship. Along with this, the planned opening of special retail stores in Mexico will also amplify its sales in the country.

Under Armour’s foreign sales presently account for about 6% of the company’s revenue, but the company is looking forward to double that figure by 2015 and contracts with numerous foreign sports teams and athletes show that the right strategies are being implemented to satisfy the expectations.

Out-muscled by the international powerhouses

Even after the recent growth, I don’t consider investment in Under Armour as an exhilarating business opportunity because of its lack of presence in the international market. Globally, Under Armour is still not capable of challenging the big guns like Nike (NYSE: NKE) and Adidas (NASDAQOTH: ADDYY) because the higher margin sales of these companies, driven by their brand’s strength, give them a competitive edge over Under Armour.

Nike’s multifarious range of products helps the company to generate revenue of more than $25 billion, indicating a rise of 8% in the fiscal year. Under Armour may give Nike a run for its money in the U.S.A., but there’s still a long way to go before it can challenge Nike globally.

Nike’s short-term investment increased $2.2 billion, as the company completed the sales of its Cole Haan and Umbro brands. Also, recent share repurchases of $1.6 billion indicates that Nike is determined to return the shareholders a good value.

Adidas, like Nike, has a strong presence in the international market and is more than capable of damaging Under Armour’s sales. Although Adidas is a Germany-based company, around 60% of its revenue is generated from the international market. The company reported an increase of 1% in revenue, while the earnings per share amplified by 6% in the previous quarter as compared to the preceding year.

The company is also planning to open around 100 new stores across the globe in 2013. The constant innovations, especially in the footwear segment, and increase in the number of stores imply that Adidas is trying to catch up with its primary rival, that is, Nike.

Adidas and Nike both are the official sponsors of some of the biggest soccer clubs in the world and the prominent fan base of those teams enables both the companies to easily outperform Under Armour.

Concluding Remarks

Even after the healthy increase in Under Armour’s margins, I don’t think an investment in the company will be a good deal, mainly because of its lack of presence in the international market. Also, a P/E ratio of 55.04, as compared to industry average of 20.65, indicates that, the inflation in the company’s share price is not matched by its earnings. So, in my opinion, now may not be the right time to buy Under Armour's stock.

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Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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