Is Under Armour Worth Considering At Its Current High Valuation?

Aug.26.14 | About: Under Armour, (UA)

Summary

Under Armour has run up tremendously this year on the back of impressive growth.

Under Armour's valuation is too high now, and its growth is expected to slow down in the coming five years.

Under Armour is making smart moves, but the company's resources pale in comparison to its deep-pocketed competitors.

Under Armour (NYSE:UA) might have missed out on benefiting from the FIFA World Cup, but there is no doubt regarding the stock's performance so far this year. The company has outperformed Nike (NYSE:NKE) on the stock market so far this year, delivering gains of almost 62%. This doesn't come as a surprise considering that Under Armour has delivered top line growth of over 20% for seventeen consecutive quarters.

However, the downside is that Under Armour now trades at an expensive 92 times last year's earnings. It is also facing competition from the likes of Skechers USA (NYSE:SKX), while Nike's financial muscle is another concern. Let's check whether Under Armour has any upside after its tremendous run this year.

Focus on running

Under Armour expects solid opportunity in three of its product categories -- running, golf, and outdoor. The company sees running as its biggest opportunity for revenue generation. Until now, its apparel segment was the key growth driver, but the footwear segment is now catching up.

According to Kevin Plank, Under Armour's CEO, the company is on track to become a key player in the global running market. Under Armour recently launched its SpeedForm running shoes, and this has helped the company strengthen its platform for the rest of the year. Under Armour has focused on delivering precision feel, fit, and comfort to customers with SpeedForm, and believes that innovations such as these will continue driving its running business going forward.

Skechers, however, is looking to spoil Under Armour's party. It has been making big moves in the running space. For example, this year's Boston Marathon champion, Meb Keflezighi, is a Skechers athlete. Recently, the company also signed American long-distance runner Kara Goucher. The company is focused on improving its presence in the running business with these deals.

In addition, Skechers is also expanding its stores across the globe. It plans to open 600 licensed stores globally in 2014, and this can improve sales of its running shoes.

Diversification counts

Under Armour has the advantage of being involved in several sports disciplines. The company is now focusing on golf, with special emphasis on performance and innovation. When it entered this segment, most of the polo shirts sold in golf pro shops were cotton. But, the company disrupted this market and now a majority of golf polo shirts are made from performance materials.

It is also seeing strength in its specialty outdoor and wholesale products. The company attributes this success to innovation and cutting-edge products such as UA Scent Control and MagZip. It will continue improving the outdoor segment with new categories like outerwear and boots, which will allow it to reach more athletes off the playing field, and expand its presence in lifestyle products.

International expansion

Under Armour is aggressively expanding its business beyond North America. The company has taken various initiatives such as transitioning its distributor in Mexico to a wholly-owned subsidiary, launching its brand in Brazil and Chile, and signing several sports marketing agreements in soccer. In a bid to attract soccer fans, Under Armour has signed agreements with two teams -- Toluca in Mexico and Colo-Colo in Chile.

Also, in key markets such as Germany and France, its brand awareness has doubled year-over-year. Management hopes to bring new consumers into its ecosystem through soccer. With a 79% increase in its international revenue in the first quarter, Under Armour is benefiting from its global brand building initiatives.

Nike's threat

No doubt, Under Armour seems to be making a number of solid moves to get better. However, investors shouldn't forget that it operates in an industry where bigger players such as Nike and Adidas (OTCQX:ADDDF) also operate. Nike has strong brand equity across the globe, and its marketing muscle is far greater than Under Armour. For example, Nike spent $2.7 billion on advertising in the last fiscal year, while Under Armour is planning to spend $330 million in marketing this year.

Additionally, Nike's cash position is strong at $5 billion, and it has debt of just $1.4 billion. Under Armour's cash position of $300 million pales in comparison to Nike, while its debt is also sizable at $196 million.

Conclusion

Under Armour has done well despite competition from established rivals in the athletic apparel market. However, the fact that it is now trading at a rich earnings multiple cannot be ignored. Moreover, over the next five years, Under Armour's earnings are expected to grow at a compound annual rate of 24%, which is lower than last five years' growth of 40%. So, it would be a good idea to watch Under Armour from the sidelines, and buy the stock on pullbacks.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.