Seeking Alpha
Long/short equity
Profile| Send Message| ()  

I'm an admitted cheapskate, so it might seem surprising that I'm a fan of both Under Armour's (UA) pricey merchandise and seemingly pricey stock. While it might seem expensive by traditional valuation metrics like P/E Ratio (over 40) or Price to Book Value (over 6), I believe the company still represents tremendous value due to the fact that its strong brand name and huge addressable market dwarfs its relatively small market capitalization, which at a mere $5B is only about 1/10th that of its main competitor Nike (NKE).

In a relatively short period of time, Under Armour has gone from a niche player catering exclusively to high end athletes to a heavyweight brand with a much broader demographic appeal, now selling apparel for activities ranging from to hunting to yoga. As the company embraces the transition from professional athletes to business professionals, they have plenty of room for future growth. Many of my co-workers already seem to have a different UA polo shirt for every day of the week, as well as comfy compression gear for casual Friday (just kidding, that would be a little nauseating given most engineers' physiques)

Under Armour is also making progress moving into women's apparel and seems to be gunning directly for market darling Lululemon (LULU) with their new test store layout. While LULU has indeed been a powerhouse in that niche, it seems absurd that LULU's market cap is larger than UA's when its addressable market is almost certainly so much smaller. Women would probably readily switch to UA products if they offered better performance or value, but I don't see Ray Lewis sporting a pair of LULU tights, even if he takes up yoga now that he's retired.

Some investors have perhaps rightly become concerned with CEO Kevin Plank continually selling shares, over $100M worth the last couple years and already another $10M so far this year, seemingly leaving him with a measly 200 common shares remaining. However, these sales represent most of his compensation in the form of stock grants tied to performance goals such as operating income targets. Furthermore, he still holds almost 18M Class B shares that have superior voting rights, giving him 17% ownership and complete control over the company, thus he certainly still has major incentives to continue working to grow shareholder value as he has already admirably done for so many years.

Another valid concern is whether the company can carry out its ambitious expansion plans abroad. They have made inroads already by operating in over 60 countries, yet only 6% of their revenue comes from outside North America. It remains to be seen whether their brand, which was born and is still linked with football can resonate as well in the rest of the world, most of which identifies more closely with another kind of futbol. Also, while I can certainly appreciate the company's logo in that it is a cool ambigram like mine, there might be some concern that a logo comprised entirely of English letters might not translate as well overseas as say the Nike swoosh.

However, I believe these concerns are overshadowed by the potential earnings power of such a strong brand as they continue entering new markets, both geographical and demographical. I am still leery of stocks with such a high P/E Ratio because they are often priced for perfection, but I would make an exception for a company with such a powerful brand and such a small market cap as Under Armour. Any bumps in the road will probably prove to be excellent buying opportunities of this company that I believe is well on its way to becoming one of the dominant players in this lucrative retail arena.

Source: Under Armour's Market Cap Discounts Its Brand Value