Olympic Speedskaters Loss Is Under Armour Bulls' Gains

Feb.19.14 | About: Under Armour, (UA)

Last Friday's 2.4 percent sell-off in Under Armour (NYSE:UA) was spurred by news that the U.S. speedskating team was blaming its Under Armour-made suits for its slow time. That news, along with the 30 percent rise in the stock following its January 29 earnings report, must have encouraged some traders to "ring the register" - a move that I think is premature. Despite the lofty valuation for an apparel company - 46 times forward earnings - the $11 billion Under Armour remains poised to continue to cut into $67 billion Nike's (NYSE:NKE) market. That simple fact should lead shares higher in the coming weeks, months and years.

Yes, the Latest Earnings Report was THAT Good

On January 29, Under Armour reported earnings that were stellar, particularly when contrast against lululemon's (NASDAQ:LULU) dismal January guidance. Let's start with the lululemon report, which sent LULU shares down 17 percent and UA shares down 7.6 percent that week in sympathy. LULU scaled back revenue expectations to $518 million from $540 million previously, a result of likely year-over-year sales declines in stores open one year.

Simultaneously, other retailers - Victoria's Secret, L Brands (NYSE:LB) and Family Dollar (NYSE:FDO) - cut forecasts in January. The landscape did not look good for Under Armour.

Yet, UA reported a 35 percent increase in fourth quarter net revenue, while net income grew 28 percent to $64 million. Earnings per share also beat analyst expectations, rising to 59 cents per share - 6 cents above consensus. Full-year revenue gained 27 percent and income rose 26 percent. EPS again beat by 6 cents to $1.50. For 2014, the company is expecting net revenue and operating income to gain an additional 23 percent each.

It should be no surprise then, that UA shares shot 20 percent higher that day.

Future International Growth is Key

Internationally, Under Armour is barely represented. North America accounted for $645 million in revenue, compared with just $38 million internationally. Part of that international expansion will come just from increased name recognition. While UA's first foray into a large, international competition may not have gone perfectly, the company has shown resilience in the past.

Its shoe line, which stumbled out of the gate, is now generating $55.4 million in revenue quarterly, up 23 percent year-over-year. Footwear remains the focus and can provide those in-roads into Nike's business both domestically and internationally. The new, ultra-lightweight running shoe that keeps feet dry provides Under Armour a level of differentiation.

It is with the same resilience that UA showed in its footwear that I expect with its international focus. Watch for the company to roll-out sponsorships abroad, just as Nike did in the 1990s and 2000s. With the company willing to undergo the investment needed in these sponsorships, while also continuing to innovate on the back-end, I expect international expansion to succeed.

Don't Judge UA by its Valuation

The knock that many bears have about UA is its high valuation. One of the most challenging things to do is look at a company and judge the market value. I have faulted in this area - particularly in analysis of LinkedIn (NYSE:LNKD) in the past.

And Under Armour does have a high multiple. UA trades at 46 times forward earnings, compared with 21.5 times in NKE and 23 times in LULU. But, UA is a new breed of company - a technology company that just so happens to manufacture high-quality apparel. Viewed in this light and with the high rate of growth the company expects to achieve, 46 times forward earnings may actually be a bargain.

From these levels, I believe UA is a great long-term buy and should actually continue to move higher in the near term - as much as an additional 10 percent this quarter. That's why any decline should continue to be bought, particularly if the price again approaches the 50-day moving average at $93 per share.

Disclosure: I am long UA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.