Under Armour's Inc.'s (NYSE:UA) (NYSE:UA.C) stock is expensive. No matter if you look at its forward P/E (Price to Earnings) ratio, its trailing P/E ratio, or its PEG (P/E with a company's growth factored in) ratio on Yahoo Finance or any other financial site, it is expensive. When it is hard to justify buying a great stock based on the numbers, you have to do some exploring to see why investors are willing to pay up for Under Armour when there are other great companies like Nike (NYSE:NKE) and Skechers (NYSE:SKX) out there.
1. The Curry Effect
Stephen Curry, of the Golden State Warriors, has been on fire since winning both a NBA title last year along with the MVP award. This year his team is in the playoffs again after a record setting year (most wins (73) ever in the regular season). Stephen Curry not only represents Under Armour every time he steps foot onto the court, he also owns UA stock after he signed with the company through 2024 at UA's 2015 annual investor meeting.
Stephen Curry's current basketball shoe, the Curry Two, has been topping the signature shoe charts week after week last quarter, according to Under Armour's latest conference call. During this year's playoffs, Stephen will be wearing the Curry 2.5, which will launch globally on July 1, 2016 ahead of the Curry 3's introduction this fall in time for the holiday season.
Under Armour's first-quarter Footwear revenues were up 64% to $264 million year over year from $161 million in the prior year's quarter, which helped drive the company's amazing 30% revenue growth for the quarter. Shoe sales are set to soar for the rest of the year after the record setting NBA season and possible deep run in the NBA playoffs coinciding with releases of new Curry shoes throughout the year.
Growth. Without growth no company deserves a high P/E. Another enormous growth opportunity for Under Armour is China, which was a key contributor in posting a 56% ($149 million) international growth rate in the first quarter. Last summer, the company brought Stephen Curry to China to help boost shoe sales. The result is that Under Armour sold more shoes in China in the past 90 days than it did in all of 2014. Later this year, Stephen Curry will make a return trip with Under Armour to China and Southeast Asia to build upon the foundation they set up last year.
3. Health and Fitness
This launch of Under Armour's HealthBox has gone well and is currently the company's second best selling e-commerce item behind the Curry 2. This Connected Fitness system measures, monitors, and manages the key health issues of a person's life including sleep, fitness, activity, and nutrition with a variety of devices and apps.
In this last quarter alone, Under Armour almost matched the revenue of its health and fitness platforms from all of 2015. Again, explosive growth and traction in a community of over 160 million registered users. The voice for Under Armour's new HealthBox is Dwayne, The Rock, Johnson who joins an ever growing community of endorsers, including Jordan Spieth for golf, Cam Newton and Tom Brady for football, Bryce Harper for baseball, Misty Copeland for dancing (ballet), and Michael Phelps for swimming.
Under Armour also just recently signed an $86 million, 10-year deal with the University of California - Berkeley to outfit all of its varsity sports teams as well as its recreational club teams (article here). The school-wide partnership starts July 1, 2017 and will also include internships for students and job opportunities for grads along with discounts for all students, faculty, and staff on the UA HealthBox.
4. Innovation and Diversification
If UA was just an apparel company, it would be hard to justify its high P/E. Same thought if it was just a shoe company or just a wearable device company. What makes Under Armour special is that it is a company that continues to diversify and innovate along all of its product lines from retail to technology and health. Plus, it is doing this while growing faster in separate categories than many of the leaders in those categories.
Here are some of the new innovative products and offerings that Under Armour has developed and is developing to keep its growth soaring for the foreseeable future:
- UA Gemini 2 RE- Fitness tracking running shoe that interfaces with the company's Connected Fitness platform.
- UA Architect - $300 shoe with a 3-D printed midsole that sold out in 19 minutes on UA's e-commerce site.
- CoolSwitch - Innovative new fabric that combines 3 active ingredients in a print technology to keep athletes cool.
- MicroThread - Elastomeric thread that dries 30% faster and is 70% more breathable than similar Lycra.
5. Growth - Pure and Simple
Here is a table showing UA's stock performance over the past 5 years. As Under Armour continues to grow at a rapid pace, so has its stock grown at a rapid pace. Under Armour started off its 20th year in business growing revenues 30% compared to last year's first quarter. Its top-line growth exceeded 20% for the 24th consecutive quarter, and it expects $5 billion in revenues over the year. The amazing thing is that company guidance and many analysts speculate very little chance of things slowing down anytime in the near future.
I can't tell you tomorrow if UA's stock will go up or down, or if it will be better to buy today or 3 months from now. What does make sense, though, is that 5 years from now UA's stock will most likely be a great investment whether you end up buying at a relative P/E peak during the time or in a trough. I bought UA's stock at a high P/E and survived the big dip in January that the stock took. I bought this stock not to make a quick buck but to look back in 5 years and say that was a wonderful investment.
Valuation is always the sticking point for stocks like this and is almost always the center to any bear/short argument. However, some things are worth paying up for, especially if you have a long time horizon (5-20 years). Just ask the runner at the gym wearing UA running shoes, or the 60-year-old maintenance man with the UA hat, or the girl wearing UA soccer shoes to her Saturday game, or the teenage Boy Scout wearing a UA hoodie while camping. I see Under Armour all day every day and will be very surprised if in 5 years I won't think of it as one of the best investments I made even though I bought in at a high P/E.
P.S. Upcoming catalysts - NBA playoffs, Summer Olympics, second-quarter earnings!
Disclosure: I am/we are long UA, UA.C.
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.