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Under Armour: Future Valuation Looks Questionable


Compared to its competitors, it's hard to see Under Armour bringing in high margins or big sales in the next few years.

Under Armour (NYSE:UA) stock is now up to $81 from $59 this past July, when I said that it was already overpriced. Momentum analysis is not my thing.

Interestingly, nothing much has changed. EPS estimates are not up significantly, if at all, and valuation is extremely stretched. Using sell side estimates of $1.64 and $2.00 for next 12 months and next two years, respectively, a 4.2% risk-free rate (Long T-bond plus .5%) and a 2% terminal growth rate, the stock discounts a 34% five-year growth rate if I assign a 7% risk discount. Consider that the sell-side consensus growth rate, which is almost always too high, is 21%, implying a $46 stock.

Even bending over backwards to justify the stock price with a 6.5% risk discount, the stock price implies 32% growth.

One thing I did not mention in my July note on Under Armour is that their customers are heavily in the 12-year-old to 24-year-old range. And of course, there is the problem of college grad unemployment, high college costs, and the coming college debt crises, all of which will weigh on UA's sales growth over the next five years. So as it happens, I was cruising Natick Mall in Natick, Massachusetts, just west of Boston, this weekend and went into a new Under Armour store, one of four prototypes opened in the US recently, or so a sales person told me.

The store was a real downer for a UA bull, in my opinion. It was merchandised for a teen and preteen audience with lots of merchandise featuring images of Superman and some other preteen and teen motifs. It was as if UA management sees the slightly older college and young adult market as financially challenged, as I do, and decided to direct its efforts toward the moms and dads of the slightly younger demographic.

One market that Under Armour might target in a search for higher margins is Lululemon's (NASDAQ:LULU) largely female consumer base. On the aforementioned weekend shopping trip, I wandered into Gap Inc.'s (NYSE:GPS) Athleta store right after a visit to Lululemon. I did not have the time to do any price comparisons, but I do know that Athleta's prices are lower, probably noticeably so, and Gap's products will probably be good quality. My guess is that the margins in Lulu's apparel will be coming down significantly, and UA's sales in this segment will not be profitable enough to support an over 30% five- year EPS growth rate.
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No positions in stocks mentioned.
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