Under Armour: What Are Investors Thinking?

You have to search the equities market pretty hard to find any companies still trading at overvalued prices, but if you look hard enough they are still out there.

One of them is making headlines today. Thanks to the company’s better-than-expected earnings report, shares of Under Armour (NYSE:UA) are trading significantly higher.

Right now, buyers are paying a 12% premium on yesterday’s closing price. Share price was even higher earlier in the day. Buyers are making a big mistake.

Out of all the undervalued gems on Wall Street right now, I cannot imagine why in the world investors are willing to shell out a sizeable premium for this already overpriced stock.

It doesn’t add up

Just look at the earnings figures released today. Over the last three months, Under Armour recorded revenues of $231.9 million, a year-over-year increase of 24%.

Get rid of manufacturing expenses, taxes, and all that other stuff and the company reported a quarterly profit of $27.5 million, or $0.51 per share. Analysts were expecting revenues of $227 million and earnings per share of $0.50.

Sure, the company exceeded forecasts, but not by the margins you would expect to see when investors bid share price up by double-digit proportions.

Because of today’s valuation surge, Under Armour now has a market capitalization of over $1 billion and a price-to-earnings ratio of over 24. That figures is nearly twice as high as the S&P 500 average.

With the company lowering its annual revenue forecasts to $750 million from as much as $775 million, its P/E ratio should be dropping, not rising.

Do not fall for marketing hype

This stock is a prime example of emotional investing and a marketing team’s effect on investors. Share price is artificially propped higher because investors believe the company truly has a long-lasting, high-demand product. But in reality, Under Armour has a terribly weak business model.

Its competitive moat is tiny, which is made obvious by the huge amount of comparable alternative products flooding the market. Plus, the company is right in the middle of an industry highly susceptible to recessionary pressures.

Let’s face it. The first thing consumers will cut out of their budget over the next few months will be trendy, over-priced underwear. If Under Armour wants to keep its products moving off of store shelves, it will be forced to greatly reduce prices. That means margins will be significantly reduced and earnings will be hammered.

My head is spinning watching investors waste their money in this stock. There are much, much better choices. The only investors that will make money on this company are the ones that are smart enough to short it.

Under Armour should be one of the worst performing companies, not one of the top performers. It is as simple as that.

Disclosure: none

Comments

[john s. gordon:]

a problem with underarmour - their product (polyester) traps bacteria near your skin leasing to bacterial cysts which have to be removed surgically. cotton performs better in this regard.
> jack

2008 Oct 29 08:26 AM

[John316:]

Andrew...why do you persist...go read your last article on UA....remember, your track record is nothing short of horrible....I notice that you stopped picking stocks and just rehash what is in the news on Fox Business or CNBC...no original insights, no value added perspective. I'm guessing you are unemployed given your track record and the market trends. I can only imagine how much money you have lost folks spewing your nonsense.

I've updated the performance of your prior picks that I highlighted the last time you published an article on UA...enjoy:

Hi Andrew. Why do you post such nonsense? One only needs to take a look at your previous submissions to see you do not have a very good ability at advising investors. You picked ABK in February @ $6 and it closed yesterday @ $2.27 (DOWN 62%); you picked MRK in August @ $33.26 and it closed yesterday @ $29.69 (DOWN 11%); you picked SWHC in February @ $4.70 and it closed yesterday @ $1.58 (DOWN 66%). Your ONLY submission that has performed is GTXI up $0.80 since you picked it in April....your track record is way worse than UA's Christmas will be!

I take it that, since you "advise many wealthy clients" on their investments, and you would post your "best bets" here on Alpha, that you have lost them a ton (A TON!) of cash...results count Andrew, and yours are terrible. Reply

2008 Oct 29 09:05 AM

[John316:]

Andrew, cover your short position and move on. You made a good call in Sept.

I'm not sure your rationale holds water. For one, the stock is 98% institutional & mutual fund owned. You seem to assume that it's the individual investor driving the price up. Number two, take a look at the declines many retail stocks took over the last month...they are over done. Fear has reduced valuations to nonsensical levels. Three, UA's earnings were totally back loaded due to their sneaker rollout and the associated marketing that hit in the first half. Given the economic downturn, and the fact that UA is doing better than they expected, institutional and mutual fund investors are scapping up shares at a discount...that's right, a discount.

Unlike you, I'm not trading this stock the next quarter's performance...my horizon is 18-24 months and I'd call it a double given conservative growth expectations and today's pps. The brand is incredibly strong (dare I say Nike like) and is here to stay.

2008 Oct 29 09:28 AM

[John316:]

Andrew, thought anyone reading your post might want to read the transcript of the analyst / earnings call...I think management's answers to the questions of analysts are much more important to investors than your overly simplistic view of the stock.

seekingalpha.com/artic...

2008 Oct 29 09:34 AM

[turb0kat:]

Flaws with this article:
1) Ignores growth rate of company and the fact that earnings are not the primary focus. P/S (just over 1) is a better indicator and much more reasonable.
2) Ignores obvious brand strength as evidenced by gross and net margins, ROE

2008 Nov 05 12:22 PM