Is Under Armour UnderValued?

Under Armour's price is down, but is it a bargain? Find out whether UA is a value investment or something to avoid

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Dec 10, 2017
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As value investors, our mission seems simple: Buy and hold stocks that are trading for less than their intrinsic value. Of course, different analysts may not come to the same conclusion regarding every stock. And that is fine. Opinion arbitrage can enhance opportunity when hunting for and capturing value opportunities.

And there is an ever-present tendency among many human analysts, one which we must consciously resist, to invoke a hypothetical value consideration based upon a company’s reduced stock price relative to the stocks projected fundamental data points. And it is a trap for many, applying wishful thinking to pure analysis, warping perspective and at times presenting a rosy outlook despite the clear and present risk of continued poor performance.

But that is where both the opportunity and the value trap exist with Under Armour Inc. (UAA, Financial)(UA, Financial). The 2017 version of Under Armour offers a drastically reduced stock price which might seem appealing despite UA’s worsening domestic fundamentals and may lead investors to prematurely identify Under Armour as a value opportunity, not as a stock to avoid for now.

Under Armour has had a terrible 2017 and most investors, except for the stubbornly optimistic ones, should acknowledge the possibility of a 2018 for the stock that is more of the same. UA stock has fallen more than 50% so far in 2017. That horrible number may not be repeated in 2018, but the company’s stock price could fall further from here. If UA's turnaround plans continue to falter value seekers will need to exercise caution.

A significant problem for the company is simply negative consumer opinion on the once forward charging organization. Marketing missteps, failure to capitalize on the domestic athletic shoe market despite the endorsement of NBA superstar Steph Curry, poor inventory management and personnel turnover within its leadership does have many investors pausing on the sidelines to wait and see.

Under Armour’s recent earnings report reinforced pessimism as UA’s apparel revenue was down 8% while gross margins dropped, like its stock price, to 46.2%. Profit was down 7.5% and net income was down $28.2 million. If that wasn’t bad enough, inventory rose by 22%.

And there are piles of unwanted athletic apparel in Under Armour warehouses domestically resulting from fading popularity in the United States. Since North America provides Under Armour with most of its revenues the 12% decline in the region easily negated the growth in international revenues which increased by a healthy 35%. Unfortunately, international sales only account for about 15% of the company’s total revenue, though that number should continue to grow.

And it should not be surprising, given the company’s 2017 performance, to learn that there has been and may continue to be significant changes in senior management. Recent departures include Marketing Chief Andrew Donkin, Senior Vice President and GM of UA’s women’s and youth lines Pamela Catlett, and Kip Fulks, who was one of the company’s co-founders. The addition of Patrik Frisk, the former CEO of the Aldo Group, is expected to positively impact the future performance of the company. And the anticipation of additional fresh talent coming on board combined with Frisk may provide the catalyst for the turnaround of which the company is capable.

It’s just not something a value investor can bank on, yet.

Under Armour CEO Kevin Plank recently suggested that the biggest problem is lower demand for its shoes and athletic apparel in its home market of the United States. That’s true, as we’ve seen. He emphasized international growth as we’ve also noted, referencing big increases in Europe, Latin America, and Asia during the quarter, as bright spots to justify optimism.

But will it be enough to save the stock in the near-term while the domestic business is fixed? And will the fix be in on schedule as the company embarks on a two-year turnaround plan?

For the time being, Under Armour should be avoided. To buy the stock today is to bet on a turnaround. But with so many questions and very few concrete answers, it is a trader’s play to buy the stock now, not a value investment. Only when the company starts giving solid data which indicate that a turnaround is in progress will value investors then want to take a closer look. There are too many potholes on Under Armour’s road to redemption.

If you already own Under Armour, hold it for now. If you don’t own it, wait. Time is on your side.

*The author does not own any of the stocks discussed in this article.”‹