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UnderArmour (NYSE:UA) reports before the opening bell on Thursday morning, January 31, 2012.

We currently don't have a position on the stock but wanted to start following UA as an alternative to Nike (NYSE:NKE), a stock that trades like Phil Knight has a 30-carat diamond stapled to his forehead. (NKE is trading at 25(x) cash-flow currently, and waiting for NKE to pull back to a lower risk valuation has been like waiting on the tooth fairy.)

Consensus analyst expectations for UA's calendar 4th quarter are for $0.46 in earnings per share ((NYSEARCA:EPS)) on $497 million in revenues for expected year-over-year (y/y) growth of 24% and 48% respectively.

That is heady growth for the sports apparel and athletic shoe brand, so the current 40(x) multiple on expected 2012 EPS of $1.20 might not seem too extreme.

US Y/Y revenue, operating inc and EPS growth
Qtr end

rev gro

y/y

op inc

y/y gro

EPS

y/y gro

1/1324% (est) 48% (est)
10/1224%21%23%
7/1227%3%0%
4/1223%15%17%
1/1134%57%41%
10/1142%32%29%
7/1142%65%71%
4/1136%56%71%
1/1136%31%47%
10/1022%20%31%

These US growth numbers look pretty good, and the hiccup in operating income and EPS growth for the company seems to be behind the sports apparel giant for now.

However this is what I worry about in terms of UA:

UA 4-qtr trailing cash-flow and free-cash summary
Qtr end

4q qtr trail

CFO

y/y

gro

4q qtr trail

Capex

y/y

gro

q4 trail

free-cash

y/y

growth

Oct '11(-$2) ml-109%$57-15%(-$60)
Jul '12(-$20)-159%$6315%(-$82)
Apr '12(-$2)-105%$7168%(-$73)
Jan '12$15-70%$79163%(-$64)
Oct '11$24-64%$67143%(-$43)
Jul '11$33-61%$55119%

(-$22)

Apr '11$41-59%$4289%(-$1)
Jan '11$50-58%$3052%$20
Oct '10$67 $28 $40
Jul '10$85 $25 $60
Apr '10$102 $22 $79
Jan '10$119 ml $20 $99

Readers can quickly see that UA is generating "earnings" growth, but not the commensurate cash flow that ultimately supports the long-run economics of a retailer.

In fact UA is remarkably similar to what we saw when we previewed BBBY's results here, in mid-September.

The thing is, UA, (like BBBY), has only $30 ml of long-term debt against $750 ml of equity so management could likely pretty easily head to the corporate bond market these days and raise all the liquidity they need.

Here is one final metric that we use in our fundamental analysis that compares to four-quarter trailing cash-flow to four-quarter trailing net income:

US TTM cash-flow versus TTM net income
Qtr endCFO/net inc
10/12-2%
7/12-19%
4/12-2%
1/1216%
10/1127%
7/1143%
4/1156%
1/1173%
10/10111%
7/10162%
4/10204%
1/10254%

* TTM = trailing twelve months. Exact same as 4-quarter trailing

Cash-flow coverage of net income has been steadily deteriorating for 3 years, and while I don't think UA is in any kind of liquidity or death crush, we would really like the sports apparel giant to start generating some cash-flow and free-cash-flow in the near future.

UA is a quality brand, and I do believe they've made Nike stand up and take notice in the sports apparel and footwear segments.

For fiscal '13, the US is looking for a $1.50 EPS on $2.2 billion in revenue for expected revenue growth of just over 20%, and management guided to the low end of the range they provided in the October conference call.

Right now. we are avoiding UA, but if it should trade under $40 we would get interested, or if in the 4th quarter 2012 it seems the company is starting to generate some better cash-flow or free-cash-flow.

UA may have bottomed already. It has gotten very oversold on the weekly chart, but we will still wait to see what earnings holds on Thursday morning.

Source: Under Armour Earnings Preview: Company Needs Cash-Flow Generation