Under Armour Takes a Breather: Is Now the Time to Buy?
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As time-starved investors, few of us have adequate resources to perform proper due diligence on every great stock in our investment universe. Looking back, I've realized many of my best investments came as a direct result of watching stocks get crushed after the underlying companies couldn't clear the bar set by the market.
That's why, on Oct. 31, I suggested we should be thankful for impossible expectations that can serve to draw attention to wonderful long-term opportunities during vicious short-term corrections.
One company that caught my attention that day was Under Armour (NYSE: UA), whose shares were punished after its solid third quarter earnings simply couldn't meet investors' unrealistically high demands.
Now, with Under Armour's next quarterly report fast approaching and its shares trading 22% below their 52-week-high, does this beaten-down athletic apparel specialist deserve a spot in your portfolio?
To help us find out, let's examine some of Under Armour's key metrics next to two of its publicly traded peers:
Under Armour sports a solid balance sheet with $157 million in cash and a low debt-to-equity ratio of 0.10. In addition, while it doesn't pay a dividend like the slow-growing Columbia Sportswear (NASDAQ: COLM) or its mammoth global competitor Nike (NYSE: NKE), Under Armour's strong ROIC of 14.1% shows it has no problems finding ways to create shareholder value while maintaining an impressive five-year revenue growth rate of 23.18%. Perhaps unsurprisingly, then, Under Armour is priced at a premium and trades at nearly 45 times trailing earnings and 31.6 times next year's estimates. When measured against analysts' long-term growth estimates of 16.9%, however, Under Armour's resulting PEG ratio of 1.87 is still slightly lower thank Nike's at 1.93.
Even still, with nearly 16% of Under Armour's float currently held short, there remain many skeptics who speculate about slowing growth and continue to yell "Overvalued!" But in all seriousness, when has Under Armour ever been considered cheap? Over the past five years, UA's average price-to-earnings ratio was 38.47. While its true that number is lower than UA's current trailing P/E ratio, we need to remember this includes 2009, which offered some memorable extenuating circumstances and arguably made the entire market shockingly-inexpensive.
Time after time, Under Armour has also been dogged by recurring criticisms of decreasing margins, inventory issues, and inconsistent free cash flow generation. Despite these persistent worries, however, Under Armour has managed to nearly quadruple since its 2005 IPO, absolutely thrashing the S&P 500's return of 14% over the same period. Don't get me wrong; I'm not about to discount the importance of these troublesome signs. To the contrary, it's absolutely necessary to keep an eye on margins, inventory levels, and free cash flow for any stock in our efforts to spot any underlying problems before they become more serious. In Under Armour's case, though, these issues alone don't tell the whole story.
Let's take a deeper look, then, at some of the other strengths that make Under Armour great:
As fellow Foolish investor Andrew Marder wrote earlier this year, "There's something special about investing in a company whose founder is still running the show." Of course, longtime equity owners of companies like Apple, Costco, and Berkshire Hathaway can certainly attest to the benefits of having a company founder in charge whose interests align with their own.
Similarly, Under Armour Founder and CEO Kevin Plank built the company from the ground up in 1996 using $17,000 in seed money while playing football for the University of Maryland. As the self-proclaimed "sweatiest guy on the field," Plank sought out the materials for Under Armour's signature moisture-wicking synthetic shirts to replace the sweat-drenched cotton used by the rest of his team.
Even now, with his company on track to achieve total 2012 revenues of more than $1.8 billion, Plank has repeatedly shown what's good for him is great for shareholders. For instance, in 2009, when the company didn't meet revenue expectations, Plank voluntarily cut own his salary from $500,000 to $26,000, saying at the time he "thought he should be paid based on the performance of the company." To be sure, as the owner of more than 20% of Under Armour's outstanding shares, investors can rest assured knowing Plank's personal fortune remains tied to the company he started.
Under Armour continues to meticulously build an innovative brand whose products people are proud to wear. From its humble beginnings, the company has always been known for putting just a little extra into everything it creates, including incredible compression suits for decreasing soreness and customized mouthpieces for allowing athletes to relax their jaws to better-regulate breathing. As the confidence instilled by these unique products reaches a fever pitch, Under Armour continues to capitalize on its success by making it known its products are no longer just for elite athletes.
Now, UA's distinct logo can not only be found on its signature shirts but also pants, shoes, socks, underwear, gloves, and hats. In addition, Under Armour offers accessories and gear including footballs, basketballs, hunting equipment, bags, sunglasses, headbands, water bottles, and backpacks -- with each product in its own way incorporating the company's unique, inventive touch.
One less enemy
In Under Armour's earliest days, its boldest marketing campaign relied on the slogan "Cotton is the enemy," in reference to the superior sweat-wicking ability of its synthetic materials. It came as a surprise, then, when Under Armour launched its Charged Cotton line of clothing in January, 2011. True to form, however, Under Armour claims the new clothing dries five times faster than regular cotton and uses the slogan "Mother nature made it. We made it better."
Why the change of heart? In an interview with Forbes at the time, Plank explained "We looked into our customers' closets and found 30 T-shirts. Four were synthetic, and the other 26 were cotton, [...] and there are some people who will still never even consider wearing a synthetic shirt. They like the feel of cotton. We want those other 26 shirts." Now, a mere two years later, Under Armour is enjoying the fruits of its labor with cotton products expected to contribute $200 million in 2013 revenue.
With Under Armour's latest earnings announcement marking its tenth consecutive quarter of net revenue growth exceeding 20%, the company has shown no signs of slowing its expansion. Still, with domestic revenue still comprising nearly 94% of the company's total base, Under Armour has just barely scratched the surface of its international potential.
Though Under Armour has so far focused its efforts on securing domestic growth, this past April it named international sportswear veteran and former ADIDAS AG executive Charlie Maurath to lead its international business. As Maurath settles in, Plank stated in the most recent quarterly conference call investors should expect to see significant progress in international markets within the next two years.
In an effort to branch out from its typically male-centric football roots, Under Armour is also finally placing more emphasis on developing its women's business through better products and brilliant new social marketing campaigns. Its efforts appear to be working as UA grabs more customers in female-dominated categories like yoga pants (where its domestic market share increased to almost 19% from 7% in 2012 alone) and showing no hesitation encroaching on the turf held capitive by strong female-centric brands like Lululemon.
In 2009, Under Armour also jumped into the $26 billion global footwear market, placing itself even further into Nike's competitive crosshairs. Though revenue from footwear recently increased 21% year-over-year to $63.2 million, it still represented only 11% of Under Armour's total revenues last quarter. For even more perspective on footwear's potential, consider the nearly $3.3 billion in global footwear revenues reported by Nike its most recent quarter alone. As Under Armour continues to differentiate itself in the space and as its international operations continue to grow, investors can look forward to watching yet another spectacular growth opportunity develop from its infancy.
Foolish bottom line
Though shares of Under Armour never really look cheap, that hasn't stopped the stock from consistently crushing the market indexes. Given the company's responsible management, focus on innovation, and multiple growth catalysts still in their infancy, I'm convinced Under Armour represents one of the best long-term investments our market has to offer. Investors would be wise, then, to take advantage of the recent pullback while it lasts.
Steve Symington owns shares of Under Armour. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, 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!