WTF is going on with Under Armour?

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This morning we woke up to news that Under Armour ($UA), one of our core holdings, is down 25%.  I was concerned because this is the second quarter we have seen a significant drop.  On one hand this hurts and drags down our portfolio, on the other hand, its just a part of the game. This post will contain a quick valuation analysis via PE ratio, a discussion of UA’s brand equity and strength and lastly discuss what this even means to our strategy going forward.

PE Ratios Matter

After looking at the numbers UA’s new PE ratio falls about in line with where NKE is.  UA has a PE ratio of 28 now and NKE has a PE ratio of 26.  PE ratios provide for a better comparison of the stock price because it takes into account the price and the amount of shares outstanding.  PE ratios are similar to comparing homes by price per square foot.  Before this recent drop UA had a ratio almost double that of Nike which indicated that the stock was overvalued and ready for a pull back.  We should have caught this and stayed on the sidelines just because the risk couldn’t justify the reward.  I think this is a lesson learned.

Financial outlook
Under Armour reported earnings of $105 million, or 23 cents per share in the fourth quarter. That’s a 1 percent decline from the same period last year when Under Armour posted earnings of $105.6 million, or 24 cents per share. Under Armour reported revenue of $1.3 billion in the fourth quarter, up 12 percent from $1.17 billion in the year-ago quarter.
Revenue from footwear increased 36 percent and International revenue also increased 55 percent. Apparel revenue increased 15 percent
This figures let me know that UA is still a solid company with years of growth, but with growing companies there are pains and pulls backs. Though we would like our holdings always spike up, markets sometimes take a turn that are unexpected and companies true things that don’t always work.
UA continues grow at an impressive rate year over year and quarter after quarter, the 25% quarterly growth maybe over. But I don’t think 10-15% is out of the question of becoming the new norm.

UA is Everywhere

If you have been anywhere on the planet you have been seeing more and more UA logos all over the place.  This is free marketing but also a sign that UA is being adopted as the Nike replacement.  Additionally, UA has a great athlete line up and athletes tend to carry brands forward.  For example, the two key athletes in the Superbowl this year, Julio Jones and Tom Brady are both UA athletes.  Last year Cam Newton was in the Superbowl and of course we know Steph Curry has been in the finals the last two years and will likely be there this year.

What I like about UA is they 10Xed their athlete line up because they have athletes in EVERY sport and they have signed the top athletes there.  It will not be long until the top athletes are thinking UA before they even consider going with Nike.

All of these things indicate that there is a significant and growing brand equity in Under Armour.  They have come a long way from just making under shirts for football players.  I know that it hurts to lose money and it hurts to lock in losses but that is just a part of the game that comes with investing.  The key is that we stay in the game when average people are running away.

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UA is another High Flyer 

I tend to catch high flying stocks like this when they are on the up and up and we make significant money.  The problem is that there is sometimes a limit to the growth and hype. We saw this in TSLA when it was running up like crazy and then slowed down.  The key thing about TSLA is that it is still a great company and over the last few months it has been creeping back up to highs that people thought weren’t substantiated AND recovering losses that came from the fall.

This means that, like the inflated RE prices of 2008, the prices are valid, they can just be a little ahead of their times.  If you look around you will see that a lot of homes that dropped in value from their peak to their value pre-recession they are back at pre-recession values.  The same can be said about stock prices.  TSLA was ahead of its time and UA was ahead of its time.  People knew that they would and could eventually overtake Nike but I think their impatience caused the stock to run up.  In due time UA will take the throne.  These falls are just giving them that extra chip on their shoulder.

What does this all mean?

This means that there is still opportunity to make all the money back and even more if we hold.  We have said it multiple times that we are in this game for the long haul.  That is what comes with investing.  We aren’t trading and we aren’t speculating.  We are buying great companies and holding on.  Given the growth, the athlete line up and the CEO I think that UA is a great company to continue to hold and we plan to do just that.

If you have still not joined you can today by emailing info@capitaltodd.com

Todd Millionaire

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