Under Armour Set To Rise

Following a UBS downgrade on 9/26, Under Armour (UA) has sold-off approximately 10%. Their primary rationale for the downgrade was that warmer September temperatures will prevent sales of cold weather gear, a factor that was key to last year's sales over the same period. UA is now nearly 20% off its 52 week high. UBS stated in their report that they were really only instituting a short-term sell on the stock; the analysts still like the long-term outlook and growth potential.

So do I. This stuff is as hot as it gets right now in specialty apparel. While it is somewhat pricey at almost 1.75x next years growth, shareholders will pay up for the growth potential and potential catalysts that lie ahead. With earnings a few weeks away, I think now is a good time to start buying. The stock and the sector are beaten down unfairly in my opinion. I think think the "short-term sell" period is over --- buyers will soon be back for the long-term story here -- perhaps into earnings on Oct. 31st.

I think don't think the analyst's rationale makes a whole lot of sense either. Weakening retail sales trends at Lowe's (LOW) and Target (TGT) are hardly fair comparisons to the sales of a brand with as much strength as UA. Also, I doubt warmer temperatures will keep loyal customers away from their brand, they will just be buying different merchandise. Plus, they rolled-out their women's line this summer -- an entire customer base that didn't even exist over the same period last year. While average temps may be higher on average, there still have been some cold periods around the country, which easily could have been enough to prompt customers to go out and buy some winter gear.

I'm long the stock and November calls, and will be buying into earnings, especially anywhere below $60/share. My target price is $75, which reflects 26% upside at its current levels.

Disclosure: Author has a long position in UA

Comments

[CrossProfit]

You 'thin think' too much! (Just admiring the typos..)

Weather is never a good reason for upgrading or downgrading a stock. If you need a pair of long-johns for the winter, warm weather just pushes off the purchase for a few weeks, at best. Chances are that valuations were too high but the analyst was playing it cautiously.

If you want a more plausible explanation as to why AU has traded the way it has over the past six weeks, see this SA article:
seekingalpha.com/artic...

Disclosure: Consensus opinion at CrossProfit.com: www.crossprofit.com.