Shares of Under Armour (UA) have had a phenomenal year in 2013. with shares rallying by 72% as the company continues to take share from Nike (NKE) and grow revenue more than 20%. Management hopes to double revenue by 2016 to $4 billion, making Under Armour a fantastic growth story. However after this rally, shares are trading at 45x next year's analyst consensus EPS of $1.78. This begs the question of whether UA is already pricing in all of the potential good news. After all, good companies do not always make for good stocks, especially when valuations are too expensive. While I recognize why the valuation could scare some investors, I think UA still makes sense thanks to three primary drivers.
Under Armour's first major driver of growth will be international sales. As of the last quarter (available here), international sales accounted for a mere 6% of total revenue. The company is really just beginning its expansion outside of the United States and has begun to open stores in China, a major consumer of athletic gear. With a concerted push overseas, I think international revenue could grow dramatically. As UA gains a similar market presence that it has in the United States, sales will grow rapidly for many years. While U.S. sales have been growing a robust 25%, international has been an even stronger performer with 37% growth.
Investors really have to ask themselves how high international can go. Nike generates over 55% of sales abroad, and international is still a growing piece of their business. I see no reason why Under Armour cannot reach the same international sales percentage as Nike over time. UA is a terrific competitor in the United States with annual growth in excess of 20%, and its products resonate wherever there are sports and athletes.
Obviously, it will take several years for international to grow towards 50% of sales. Still, I do expect international sales to continue to jump at an extremely fast pace. With a smaller revenue base, I believe organic sales growth of 35% is an appropriate five year target. At the same time, UA will be expanding internationally into new countries, adding new stores and distribution deals. With organic growth of 35% and a growing international presence, I believe international sales growth could be around 45-50% over five years. At the low end of my forecast, revenue would grow by over $800 million over that time. Even then, international would account for less than 25% of total revenue. International has significant upside beyond five years. International sales can drive UA growth for over a decade.
Next, Under Armour remains a male-dominant brand with women's apparel only accounting for 23% of revenue. If the company can get women to wear the product closer to the rate of men it would be a fantastic development for investors. The company is taking steps to increase its penetration with news sports bras and other products geared towards women. Under Armour may also have found a market opening with Lululemon's (LULU) self-inflicted wounds this year. Lululemon has shot itself in the foot recently, with product recalls and offensive comments by former management. These mistakes leave the company vulnerable to insurgents like Under Armour. LULU's success shows women want athletic gear but, with its brand facing issues, this is a prime opportunity for UA to gain share among women. We have seen UA successfully expand its product line with outerwear, golf shirts, and footwear, and women are the next big growth opportunity.
Last, Under Armour has found success by being the technology apparel company. With innovative fabrics and synthetics, UA has made products that are lighter. Some let out heat while others do a better job retaining it and so on. As a consequence, UA has the potential to monetize wearable technology, which has become an increasing focus of tech companies like Intel (INTC) and Apple (AAPL). Just last week, Intel announced a deal with FC Barcelona to put a logo inside the shirt as the company works on chips that could provide biometric data. Given Under Armour's history of technological innovation with apparel, wearable technology could be an area of growth and further differentiation. While these products that fully integrate clothing and technology may be some time way, they are another source of growth for Under Armour in the years ahead.
With international, women's apparel, and technology, I see significant growth opportunities for the company, and expect revenue and EPS to double by 2016. Here is what I see the company's growth looking like over the next six years. As you can see, the upside potential is dramatic:
Thanks to strong international growth, this company can still grow by over 20% in 2019. If you assumed a PEG ratio of 1, the stock will trade at around $125 in 2019, resulting in an annual return of 7.6%. With a less conservative PEG of 1.5, shares will trade at around $185 for an annual return of 15%. While Under Armour may look expensive today, its growth prospects are so large that shares can easily grow into the current multiple. Even with appreciable multiple compression shares will provide a solid long-run return for investors. I would be a long-term buyer of UA.