Under Armour is Starting to Look Attractive

Under Armour is down about 30% since they announced earnings a couple of days ago. They are also down about 61% from their 52-week high. It’s been a tough year for the company, but this is looking like an overreaction.

There are a couple of things going on. The more minor portion of this is that the company has decided to invest more heavily in growth. This sounds great, and I love to hear this from management. They are looking to invest for the long term. What this means for the bottom line is diminished earnings. When I hear this, I think of Amazon. They have focused on gross margin for years, investing heavily in infrastructure, R&D, and people. Earnings have looked minuscule, but the company has crushed its competition and grown to a behemoth.

Under Armour is seeing the same effect on its bottom line. Not all investment shows up on the cash flow statement. Some of it ends up being embedded in selling, general, and administrative expenses (SG&A). I think the same thing is showing up for Under Armour. A normalized earnings per share number of $0.58 could be much higher if not for investments that show as expenses on the income statement. Hopefully the 10-k sheds more light on what the actual number might be. Until then, it is enough to know that their earnings could be interpreted as being understated.

The bigger issue for the company is that one of their main selling channels broke in 2016, quite literally. Sports Authority went bankrupt and liquidated their inventory at close-out prices. The market got flooded with cheap Under Armour gear and one of their main channels disappeared. That’s tough for a company to recover from.

All this sounds disasterous, but revenue still grew by 22% for the year. Operating cash flow was over $300 million for a company that now has a market cap of $8 billion and that is still putting up impressive numbers.

The sell-off is also likely two-fold. The stock was priced for perfection at its 52-week high, and guidance for 2017 is tepid. Operating earnings will be more or less flat, and net revenues are anticipated to grow at 11-12% in 2017. Wall Street views this as a broken growth story.

Solid and aggressive management has led this company to where it is now. It has built a solid brand with solid leadership. I have confidence that they will expand their sales channels in North America effectively and that they will continue to have traction internationally. I need to spend more time on valuation, but my back of the napkin value puts them at about $200 per share in 10 years. This assumes they get back to 20% growth on average over the next 10 years. If the growth story really does require a re-adjustment to 10% growth, the stock only gets to $50 in 10 years. I think that’s unlikely.

I definitely want to spend more time on this, and I’m watching it closely. If it gets some support from the market, I’ll likely start buying. I think this is a great brand and the company has very good management. It looks like a long-term winner.

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