Can Under Armour Run with the Big Dogs?

Under Armour (NYSE:UA) has made significant strides in catching up to industry powerhouses Nike (NYSE:NKE) and Adidas (ADDYY.PK) over the last decade. With a large market share in the U.S., and growing popularity overseas, Under Armour looks poised for profitability in the coming years. However, does the stock’s high price justify its growth opportunities? Let’s use our CHEAT SHEET investing framework to decide whether Under Armour is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

With its popular campaigns such as “Protect This House,” and key sponsorships of American athletes including Lindsey Vonn, Tom Brady, and the U.S. men and women’s Olympics gymnastics team, Under Armour has established a presence in the domestic marketplace.

However, as 94 percent of its sales come from the U.S., the same cannot be said for its foreign operations. According to CEO Kevin Plank, the company hopes to change that by ramping up its marketing efforts in Europe and Asia. One win for the company was reaching a deal with English Premier League team Tottenham Hotspur to supply the team’s jerseys. The company has a long way to go to catch up to international players like Nike, which generates more than half of its $6 billion in revenue from overseas markets. Still, if Under Armour can find success abroad while keeping marketing costs at a manageable level, the company has huge growth potential.

E = Earnings are Mostly Increasing Year-over-year

Under Armour announced its first quarter earnings in April. The company beat analysts’ earnings estimates of $0.03 a share, reporting EPS of $0.07. However, earnings were a full 50 percent lower than in the previous year’s quarter. This earnings miss comes after two consecutive quarters of year-over-year earnings growth. The decrease stemmed from lower operating margins due to increased marketing costs, as the company continues its expansion program in North America and abroad.

Investors will have to wait and see when and if the higher marketing expenditures will pay off in the coming year, but the company expects year-over-year revenue will increase by up to 24 percent for the entire fiscal year. Additionally, Under Armour expects that its operating margin will improve next quarter. The company announced its second quarter earnings on July 25.

2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1
Qtrly. EPS $0.07 $0.47$ $0.54 $0.06 $0.14
EPS Growth YoY -50.00% 51.56% 22.73% 0.00% 21.74%
Qtrly. Revenue $471.61M $505.86M $575.20M $369.47M $384.39M
Revenue Growth YoY 22.69% 25.49% 23.56% 26.82% 22.93%

*Data sourced from YCharts

E = Excellent Performance Relative to Peers?

Under Armour’s chief competition are sports apparel giants Nike and Adidas. Lululemon (NASDAQ:LULU) is also included — despite a smaller product line and a different target market — because they are a high-growth sports apparel company, like Under Armour. The most striking item on the table is the price to earnings ratio, of which Under Armour has the highest, by 1.5 times.

The company has more growth opportunities than the more mature brands Nike and Adidas, but it is much more expensive than the high-growth darling, Lululemon. Under Armour’s gross margins are not as impressive as those of Nike’s and Lululemon’s, but Lululemon’s margin is not as easily sustainable, as it will certainly face increasing competition in the future. On the basis of the price to earnings growth ratio — remember, the lower the better — Nike and Lululemon both trump Under Armour.

UA NKE ADDYY LULU
Trailing P/E 54.44 23.29 32.68 36.64
Price/Sales 3.36 2.23 1.21 6.82
PEG Ratio 1.98 1.83 -2.65 1.56
Gross Margin 6.34% 9.82% 3.68% 18.96%
Dividend Yield N/A 1.30% N/A N/A

*Data sourced from Yahoo! Finance

T = Technicals on the Stock Chart are Mixed

Under Armour is currently trading at around $61.90, well above both its 200-day moving average of $54.63, and its 50-day moving average of $59.91. The stock has experienced a strong uptrend since the beginning of the year — up around 30 percent in the last six months. The stock experienced a slight pullback during the month of June, but seems to have resumed its bullish trend.

Conclusion

Under CEO Kevin Plank’s guidance, Under Armour has established a growing domestic presence. With revenue growth of more than 20 percent each quarter, the company continues to resonate with American consumers. However, it faces an uphill battle in trying to compete with giants Nike and Adidas in European and Asian markets, both of which have already established strongholds abroad. Additionally, niche player Lululemon could threaten Under Armour’s female customer base in the U.S.

Under Armour will most likely report strong revenue growth and improving margins when it announces its second quarter earnings on Thursday. However, with a price to equity ratio of 54.44, the market is too optimistic on a mid cap U.S. company growing its business significantly overseas in the medium-term. Until definitive gains are made in overseas markets, Under Armour is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from The Cheat Sheet