Under Armour: Getting Closer to the Bottom?

Under Armour (UA) has come under pressure in the past couple of month with UA missing numbers and guiding 2009 lower and an economy and market in shambles. Yesterday, Citigroup revised its price target to 12 with a sell rating and the other day Goldman Sachs initiated UA with a sell and $12 price target and Jan 30^th Piper Jaffray lowered its price target and downgraded the stock to a sell. Nothing like the analysts coming and downgrading the stock post the fact; but that’s a topic for a different day.

When I first wrote about UA in December, the stock was a bit under 27 I felt the company would have to lower numbers and that the stock would fall to the 10-12 range. I still feel there is downside risk to the stock from these levels. With the economy showing no signs of recovery any time soon and competition stiff; shoppers will think twice before buying the $50 mock tee shirt. With LULU sitting at under six and reducing store openings and other retailers hurting; it will surely be a challenging time for UA. The company reduced estimates for 2009 to the .76c-.78c range (hopefully they were smart enough to build enough of a cushion in on the downside for themselves). With that said should the stock fall to the 6-8$ range (8-10x earnings) I would have to certainly think twice about the stock. UA makes a great product and this would certainly be a great acquisition long term for Nike (NKE).

Stock position: None.

Comments

[Korby:]

Looking at Under Armour's fundamentals, I'm worry very little about how much more it could go down, because all signs point to the stock being worth more than it is currently.

I can understand why investors are wary of the stock. We've been told that this recession will be particularly bad on retail stocks and especially higher-end retail stocks like UA. UA's value metrics (P/E, P/S) also aren't as low as some other stocks that value stock pickers have started to vulture.

However, I believe that a look at the SEC filings show that UA has been oversold, even for a retail stock.

The price of UA is less than half of what it was in March 2008, but from March 2008 to December 2008 UA's sales were actually 14% higher. UA's current ratio is lower during that same time period (3.83 to 2.97), but the company's cash position is higher and it hasn't been afflicted with the same inventory build-up (only 9% growth from March 2008 to December 2008) that other retailers have. Good inventory management and steady sales bode well for a retailer to come out of the recession stronger.

UA has also had positive cash flow for all four quarters of the past year, with most of the cash coming from healthy areas like operating activities. The company has kept borrowing steady but low.

The company looks stronger to me than it did a year ago, and now is trading at more than a 50% discount from its 2008 highs. That's worth a buy in my book.

Feb 27 03:48 PM