As Under Armour (NYSE:UA) bounces off the bottom again near $30, my view on the stock has turned at least neutral and possibly bullish. The biggest problem now facing the stock is the negative sentiment on the sector.
The stock though might have a huge secret weapon. One of the key differences between valuing Under Armour and sector leader Nike (NYSE:NKE) is this key metric that could quickly boost the valuation of UA, though the current trend could send the stock lower first.
Hard To Break Negative Trend
Whether heading up or down, a stock always faces a difficult time breaking a trend. In the case of Under Armour, the stock peaked towards the end of 2015.
One of the prime boosts to the athletic apparel manufacturer over the previous couple of years was a string of successful endorsements paying off big. From Jordan Spieth winning a couple of majors on the PGA tour to Steph Curry becoming a shocking MVP winner and NBA champ, Under Armour was on a roll.
These top profile endorsement wins though haven't blown away the competition over the last year. Spieth isn't the dominant golfer yet, now sitting 5th in the World Golf ranking.
At the same time, Curry won a unanimous MVP to cap off a huge year, but the Golden State Warriors failed to win the NBA championship in a stunning 3-1 collapse. The addition of Kevin Durant to the team this year has his numbers down from record levels last year.
The end result is a suggestion by the Foot Locker (NYSE:FL) CEO on the recent earnings call that the Curry 3.0 sneaker wasn't selling up to expectations. CEO Richard Johnson made the following statement when asked about the ability of the Curry platform to sustain momentum:
As I talked about, the 2.0 and 2.5 Curry shoes in third quarter performed well. The 3.0 is fairly new into the business. It started off a bit slower than the two previous models but, again, it's early days.
While great endorsement wins for the price paid by Under Armour, neither player appears in a place to grab a larger-than-life following that would lead to unfettered growth for the company.
One Metric To Shift The Trend
My previous investment thesis became more bullish on Under Armour as the faster growing concept dipped to a P/S multiple similar to a massive Nike. The theory being that Under Armour would eventually turn around the issues with margins by turning off the spending spigot.
In reality, Under Armour has solid margins in comparison to Nike. The key metric is heading in the wrong direction, but the bigger issue is the massive tax rate paid by the domestic focused retailer. In contrast, Nike gets a large portion of revenues outside the domestic market and pays a significantly lower tax rate.
Under Armour guides to an expected tax rate of 35.5%. For FY17, Nike expects to pay an effective tax rate of 17% and guides to an ongoing rate of 22%. The following chart highlights the general discrepancy in the tax rates though the numbers are slightly off due to adjustments not removed from the data feed for the chart.
These numbers speak to the problems with the tax code in the U.S. With a Republican-controlled White House and Congress, the general expectation is that the corporate tax rates will drop. The possibility exists for Under Armour to effectively half the bill paid to Uncle Sam. Sure, Nike will see a similar benefit for domestic profits, but the impact will be much smaller with all of the international profits.
In the case of Under Armour, the forecasted 2017 EPS would jump from $0.69 to $0.89 based on an effective corporate income tax rate of 20%. The stock isn't so expensive trading at nearly $30 in that case.
The key investor takeaway is that Under Armour would see massive benefits from a corporate income tax cut. Such a move by the U.S. government would likely shift the momentum in the stock at the current price.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UA over 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.
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