Is This The Right Time To Stock Up On Under Armour?

| About: Under Armour, (UA)

Summary

Under Armour has seen a steep decline in market price in the last month.

Company fundamentals remain strong along with a significant growth potential.

DCF analysis indicates that the intrinsic value of UA can be between $ 30 to $ 50 depending on the margin of safety.

For investors who have been waiting for a correction in UA prices, this could be the time to buy.

After a sharp decline in the market price last month, there was suddenly a spike of interest in Under Armour NYSE: UA. Was this decline a much needed correction in UA's share price? Or did this happen due to a panic reaction among share holders? Does this correction give us a chance to enter into this stock or is the price still too high?

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In order to find answers to all these questions, I decided to perform a DCF analysis.

I conducted a DCF analysis of Under Armour taking into consideration its historical performance for the last 10 years, analysis of financial and non financial factors and built a forecasted P&L statement for the next 10 years.

Here is the analysis:

Historical analysis for the past 10 years:

Financials

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Revenue

431

607

725

856

1,064

1,473

1,835

2,332

3,084

3,963

Gross Profit

216

305

355

410

531

713

879

1,137

1,512

1,906

EBITDA

67

101

92

113

142

199

252

314

420

502

Net Income

39

53

38

47

68

97

129

162

208

233

EPS (Diluted)

0.10

0.13

0.10

0.12

0.17

0.23

0.31

0.38

0.48

0.53

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Geographical distribution of revenue in 2015:


Under Armour currently has a very strong presence in North America, which accounted for almost 87% of 2015 revenue. The other international markets included China, Latin America and Southeast Asia.

This scenario is changing with Under Armour executing plans for its international expansion, particularly having its eyes on the growing China market. Under Armour is also investing in technology and has an e-commerce presence in several countries where it does not have a physical presence as yet.

Product wise revenue

Apparel formed almost 71% of the total revenue in 2015. As can be seen from the table below, the company is making a positive shift in favor of the other business segments as follows. Growth in the core Apparel segment remains strong.

2015

% change in 2015 over 2014

2014

% change in 2014 over 2013

2013

Apparel

2,801

22.3%

2,291

30.0%

1762

Footwear

677

57.4%

430

43.8%

299

Accessories

346

25.8%

275

27.3%

216

License

84

25.4%

67

24.1%

54

Connected Fitness

53

178.9%

19

1800.0%

1

Total sales

3,961

28.5%

3,082

32.2%

2,332

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The following points are note worthy from a historic analysis of the company and can be used to build a DCF model:

1. Growing athleisure market

According to a recent research report by Morgan Stanley, the "Global Athletic Wear" has a very bullish outlook. Sports apparel and footwear sales have jumped up by 42% over the last 7 years. This report estimates that the athletic wear industry could add up to $ 83 billion in sales by 2020, which is almost a 30% growth and that Asia could be the biggest contributor to this growth.

UA is becoming a popular brand with the younger generation, but the company does not have to rely merely on grabbing market share from its competitors. The athleisure market itself is growing at a rapid pace making room for everyone to expand.

2. International expansion

UA has a substantial presence in the United States, but it does not have a very strong presence internationally.

This scenario is definitely changing with Under Armour executing expansion plans for its international expansion, particularly having its eyes on the growing China market. Meanwhile, UA also has an e commerce presence in several countries where it does not have a physical presence as yet.

3. UA has plenty of room to grow its existing products

4. UA has demonstrated the ability to expand into different products in the athleisure segment in the past

In the last 20 years, UA has slowly but steadily expanded into various athleisure products. Even in the apparel segment, it primarily began with the HotGear t-shirt and slowly one after the other expanded into the HotGear shirts, AllSeasonGear, Women's t-shirts, t shirts for girls and boys. After the success of its apparel business, UA ventured into the footwear section in 2006. It also acquired Myfitness app recently and aims to be the one athletic brand for sportsmen from head to toe. Entering into the other product segments will definitely be much easier for UA given its brand existence and will be able to utilize the economies of scale in a much better manner.

5. . Management Quality

The founder and CEO of Under Armour, Kevin Plank has been with the company since inception. His vision, focus and passion to make world class products has been instrumental in UA reaching great heights. The company will continue to show promising results under such able management.

6. MOAT

The hard work and effort which the management team has put in has started showing results. UA has become a household name and people associate themselves with the UA brand just as they do with Nike and Adidas. A growing number of millennial are associating themselves with the UA brand and this is exactly the market which UA is also looking at. Millennials are here to stay with their brand for a long time.

Future Growth Predictions:

After analyzing the various components of revenue growth, it is quite certain that UA has a tremendous scope for expansion. This is only the beginning of a long lasting growth story. The historical average growth rate however seems to be a lot on the higher side also considering the fact that UA will not be able to sustain this growth rate once it reaches a certain level of revenue. Therefore, considering all the factors mentioned above, I have made the following revenue predictions

Year 2015A 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F
Net Revenue 3,961 5,000 6,350 8,065 9,919 12,002 14,283 16,425 18,561 20,973 23,700
Increase in revenue over previous year 27% 27% 27% 23% 21% 19% 15% 13% 13% 13%
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Future Gross Margins

Currently, UA has been exhibiting a very health gross margin rate of around 48% - 50% each year. However, UA's majority margins are coming from its apparel business in the USA. As the company expands in other countries with a change in the product mix, the gross margins are likely to take a hit. So, going forward, I have estimated the gross margins to be around 45%. These are closer to the margins which UA's competitors have demonstrated on a sustained basis and the industry average.

Income from operations

Under Armour's SG&A expenses are fairly on the higher side due to increased expenditure on marketing and branding expenses. The company will also have to spend on geographical expansion, acquisitions etc. These expenses are likely to continue for the next few years. However, as the company reaches around $ 1 Billion in revenue, these branding activities will start paying off and the company will start reaping the advantages of the economies of large scale production. SG&A expenses are expected to substantially reduce after this point and income from operations will increase which will also have a positive impact on the net margins.

  • Valuation Model

Year

2015A

2016F

2017F

2018F

2019F

2020F

2021F

2022F

2023F

2024F

2025F

Net Revenue

3,961

5,030

6,389

8,114

9,980

12,076

14,370

16,525

18,674

21,101

23,844

Increase in revenue over previous year

27%

27%

27%

23%

21%

19%

15%

13%

13%

13%

Gross Profit %

45%

45%

45%

45%

45%

45%

45%

45%

45%

45%

Gross Profit

2,264

2,875

3,651

4,491

5,434

6,466

7,436

8,403

9,496

10,730

SG & A

4,448

5,663

7,203

8,882

10,808

12,789

14,377

16,246

18,358

20,745

Income from operations

583

726

910

1,098

1,268

1,581

2,148

2,428

2,743

3,100

Interest expense

15

15

15

15

10

10

15

15

15

15

Cash taxes

221

277

349

422

491

613

832

941

1,064

1,203

WC/Revenue

53

68

86

93

105

115

108

107

121

137

Full capital spend

112

143

181

196

220

241

226

226

255

288

FCF to equity

180

223

279

371

442

602

967

1,139

1,288

1,457

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Other assumptions:

Discount Rate

6%

Terminal growth rate

3%

Present Value of FCF (Mil)

21,739

No. of shares (Mil)

446

Intrinsic value per share

48.74

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As you can see from the calculation above, the intrinsic value per share comes out to $ 48.74. Considering a margin of safety of 35%, the fair price will be:

Intrinsic value per share

$ 48.74

Margin of safety @35%

$ 17.06

Fair value

$ 31.68

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As of November 17th 2016, Under Armour is trading at $ 32.37 per share. This seems to be quite close to the fair value as per our calculation. For those who have been waiting to add Under Armour to your portfolio, this would be a good time to do so.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.