A Suit of Armour for Your Portfolio
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Under Armour (NYSE: UA) is one of the most popular sports performance brands in the world. This line of technologically advanced products "wicks" perspiration off of your skin instead of absorbing it. This allows your body to regulate its temperature and enhance performance, whether during intense training, a sporting event, yoga, or any other activity. Athletes immediately embraced this product when it was first developed in 1996, and everyone else has been flocking to them since.
Under Armour is growing rapidly in major sports, including becoming the official footwear provider of Major League Baseball, the official glove provider of the National Football League, and the official sponsor of the NFL Combine. Under Armour has landed major athletes in all sports to be the face of the brand, like Ray Lewis, Tom Brady, Cam Newton, Michael Phelps, Bryce Harper, Jose Reyes, and Brandon Jennings. They are slowly taking over the college scene, landing contracts to provide apparel to 10 major universities, including Auburn, South Carolina, Boston College, and Northwestern. This company is hard at work.
Under Armour is showing a strong presence in Europe too. Over 90% of Under Armour's revenue came from North America, so increasing sales outside of the U.S. could prove huge for the company. The main way in which they are making this happen is through the soccer market. They have landed contracts with soccer teams in France, Germany, Italy, and Spain, to name a few. The most notable soccer team signed to a deal is Tottenham Hotspur, which is a team in the English Premier League. Reaching the Premier League is a major milestone for Under Armour in its quest to become more like Nike and Adidas in Europe. Expanding with other teams will be a challenge, as Nike (NYSE: NKE) and Adidas own rights to the top 10 soccer clubs.
Under Armour has seen a challenge in the marketplace by Nike and their Nike Pro line of performance apparel. With a very similar fabric and feel, Nike Pro and Under Armour have been in a head to head competition. It is much like the Coca Cola versus Pepsi taste challenge, or the Gatorade versus Powerade hydration challenge. Nike Pro marketing has actually helped Under Armour, as it tells the benefit of having lightweight, breathable material during intense training. This is one situation where Nike is a plus for Under Armour.
Under Armour has been innovating, creating two new products that have helped increase their apparel sales by 25% compared to the previous year. Storm Fleece and Charged Cotton have become top sellers and should continue to grow in popularity. Charged Cotton is one of my personal favorites because it has the look of a normal shirt, but a much more comfortable and compressed feel. I originally purchased one with a gift card from Christmas and was back in the store a week later for 3 more.
Under Armour is increasing its focus on developing shoes, and has begun taking share from Nike in the footwear space. Under Armour reported a 43% increase in footwear sales year over year, once again due to innovative products and existing products gaining popularity. New products like UA Spine and their 2013 line of cleats have provided an instant boost. Nike is the top player in this market, so it is basically their game to lose. It is extremely unlikely that Under Armour will become the top dog in this race, but even taking a 10% market share would prove huge for Under Armour's bottom line. In 2012, Nike had an estimated 37% of the athletic footwear market, while Under Armour had just under 2%. If Under Armour were to take a 10% share in the footwear space, this would result in over $5 billion in footwear revenue alone. Overall, Nike is a global brand with incredible power, so this competition is not going away.
A key to the growth of Under Armour has been the expansion of stores who carry the products and their own outlet stores. One retailer in particular, Dick's Sporting Goods (NYSE: DKS), has been growing like a weed as of late. Dick's currently operates 500 stores in 44 states, but has a plan of reaching 900 stores within the next few years. This is great for Dick's, but even better for Under Armour. The more locations Dick's adds, the more shelf and floor space Under Armour will ultimately have. Dick's carries most, if not all, of Under Armour's products. These include apparel, footwear, gloves, hats, socks, hunting hear, bags, and other accessories. Basically, if Under Armour can make it, Dick's will stock it. Dick's currently does not have plans to expand outside of the United States or into Canada, but they did not rule it out as an idea for the future. I believe Dick's can grow into more of a North American sporting goods icon as Under Armour grows into a global brand.
Under Armour is currently trading around $49.75 per share. At this level they are trading at 41.1 times their earnings of $1.21 per share. This may seem high, but due to their high growth investors are willing to pay up for this stock. Over the next 3 years Under Armour will see incredible growth in earnings, and the chart below illustrates this.
From the data on this chart, the stock is clearly a long term buy. At current levels, Under Armour is trading at just 21.4 times 2015 earnings. With how fast this company is growing, I believe these estimates are too low. By landing a few more contracts amongst all levels of sports and athletes alike, Under Armour has the potential to post earnings closer to $2.75-$3.00 per share in 2015. A beat on earnings caused a spike above $52 on Jan. 31, but the stock then came back down. A return above $52 should be easy for Under Armour, especially since the stock is down around 11.5% over the last 6 months. I am looking to purchase this stock if it pulls back another point or two, and am initiating an outperform call on CAPS. Under Armour is a long term BUY.
JoeySolitro1 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!