Under Armour: An Excellent Short Opportunity?

| About: Under Armour, (UAA)

Shares of Under Armour (NYSE:UA) have an excellent YTD return of 58.13%. Its 3-year performance is even more astonishing at 373%. The current stock price of $56.76 is only slightly off from the 52-week high of $58.48. The substantial price appreciation over the past few years is primarily driven by the company's robust sales growth. But at this level, I am bearish on UA for a simple reason that the lofty valuations are really hard to be justified with the firm fundamentals. In this article, I will illustrate the rationales that support my perspective.

UA's revenue has almost doubled over the past 3 fiscal years, and the revenue growth rate had been increasing over the same horizon (see chart below). The strong sales growth has helped boost the stock valuations as LTM EV/EBITDA and P/E have increased from 10.7x and 26.5x to 28.4x and 59.6x, respectively, over the past three years (see chart below).

Compared with a peer group consisting of Lululemon (NASDAQ:LULU), Nike (NYSE:NKE), Adidas and Puma, UA stock is currently trading at a whopping premium. The current stock price of $56.76 implies an average premium of 133% over the peer average NTM EV/EBITDA and NTM P/E multiples (see chart below). Apparently, one would expect UA to have an exceptional fundamental position relative to its peers.

Nonetheless, UA's profitability performance appears to be mediocre. All of UA's margin metrics are below the peer averages. Its return on equity is also below the par, although ROIC is just marginally better than the group average (see above table).

In terms of liquidity, UA is also not doing well enough. Its LTM FCF is currently in negative territory as compared to the group average of 3.5%. Its debt to capitalization ratio of 9.7% is not very high on an absolute basis but remains above the peer average level. As a result, the firm's interest coverage rate is slightly below the peer average. However, UA's current and quick ratios are fairly comparable to the peers' level (see above table).

UA's growth potential appears to be the only reason for the stock's lofty valuations. But if you refer to the stock's 2.0x PEG, you would not make such a conclusion that the price is reasonable relative to the growth prospects (see above table).

In addition, LULU is the only firm in the peer group that is trading at somewhat comparable valuations. If only compared with LULU, UA still trades at an average premium of 24% over LULU's EV/EBITDA and P/E multiples (see table below). But both firms' financial conditions are nowhere to be comparable. LULU's financial performance is substantially superior to UA's in every aspect, further suggesting that UA's valuations are exaggerated.

I am aware that some investors may argue that UA's EV/Sales and P/S are lower than those of LULU (2.9x and 3.0x vs. 5.6x and 5.9x, respectively). As a company's growth slows down and its operations become more matured, which is the case for UA at present, market would gradually put more weight on the company's profitability and return metrics, and valuation multiples such as P/E and EV/EBITDA would become more relevant. As such, I believe UA's high P/E and EV/EBITDA would be under increasing correction pressure if there is no significant improvement in various margin measures down the road.

Bottom line, UA's expensive stock is priced for continued strong growth and perfect strategy executions which I believe are hard to achieve. As such, I strongly recommend investors avoiding or shorting the shares at the current price to profit for a very likely price correction.

Comparable analysis tables are created by author, all other charts are sourced from Capital IQ, and all financial data is sourced from Morningstar and Capital IQ.

Disclosure: I am short UA, LULU.

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