Just a few years ago, Under Armour (UA, Financial) was widely seen as a third force in the sporting goods market behind the current global leader Nike (NKE, Financial) and Germany-based Adidas (ADDYY, Financial). However, Under Armour has since overtaken Adidas to move into second place and now looks set to cut the gap between it and Nike.
Under Armour has a long way to go before it can significantly close the gap on Nike, given its market valuation of about $19.35 billion versus Nike’s $114 billion. On the other hand, Adidas is currently valued at about $18.94 billion, coming in third behind Under Armour. The company has embarked on an expansion campaign that could see it double revenues in the next three years, which means that given the current valuation multiples (based on top line), the company could close the gap significantly.
Right now, Under Armour is not the kind of stock every value investor would be looking at. However, for those who value growth stocks, then this stock could be a good play given its growth prospects.
Under Armour’s plan to double revenue may seem a little ambitious to some investors, but the company does appear to have a solid plan in place that will drive this growth.
The growth story in focus
In a recent presentation to investors, Under Armour highlighted its Connected Fitness business segment as one of the areas it aims to utilize in boosting growth over the next few years. The company revealed that it now has more than 60 million monthly active users drawn from its 150 million registered users across various platforms.
The connected fitness market is growing at unbelievable rates and is making Under Armour a more diversified company by exposing it to the $2 trillion food and nutrition industry as well as the $8 trillion health and fitness industries.
The company made two crucial acquisitions over the last three years to boost its connected fitness business segment, which brought about 100 million registered users in total at acquisition. MapMyFitness was acquired for $150 million in 2013, bringing in 20 million registered users while this year’s acquisition of MyFitnessPal for $475 million added another 80 million users.
The company has been accused by some investors and analysts of spending too much on capital expenditure, but those aligned to the growth story will be looking at the huge market ($10 trillion combined) that it will access via connected fitness.
The company’s capital expenditure is expected to increase 8% to 10% through FY 2018, which compares to about 3.5% average for the last five years. This is due to its international expansion via capacity investments, international store growth, IT development and a headquarters expansion in Baltimore and overseas, as per a recent note to investors from Cowen & Co.
The company is also expected to continue spending on brand growth via sponsorships as it seeks to match Nike toe to toe. The company is rapidly becoming a renowned global brand by sponsoring famous athletes, promising talents and sporting kits for top sports clubs across the globe.
With a renowned brand and global outlets, the company looks set to increase top line and is hugely betting on footwear to deliver. Under Armour revealed that it expects revenue of about $1.7 billion in FY 2018 from footwear alone, which equates to a CAGR of about 40%. This could easily see the company more than double revenues from this unit by 2018.
Under Armour is projecting that footwear will account for 22% of its overall revenues in 2018, which translates to total target revenue of about $7.7 billion. On the other hand, apparel is expected to account for 65%; accessories and connected fitness will contribute 10% and 3%.
The company is also focusing on increasing partner relations rather than owning a majority of stores by having 70% of stores owned by partners by 2018, as compared to 35% in 2014. This will help the company’s international expansion campaign as it seeks to boost its international revenues, which accounted for 9% in 2014. Under Armour expects to double this percentage rate by the year 2018.
Can Under Armour pull this off?
As pointed out earlier, there are those who still think that this is a little too ambitious. If you look at the company’s past performances, then you won’t write off this growth story.
For instance, Under Armour breached the $1 billion mark in revenues in 2010, and last year, the company surpassed the $3 billion mark. As such, the company’s revenues tripled in four years making it one of the best performers over the last few years.
This was not a surprise for those who have been monitoring the company for decades. Under Armour has managed at least 20% revenue growth in each of the last 21 quarters. The company needs a CAGR of about 33% for the next three years to achieve its target of doubling top line; based on past achievements coupled with the expected expansion, this appears to be realistic.
It is worth noting that judging this company based on P/E ratio may not be the perfect way to evaluate your buying decision especially at this point given the company’s high price-to-earnings ratio of 91.70x, which compares to an industry average of just 17.96x.
Conclusion
The bottom line is that Under Armour appears to be transforming into a global brand with the expansion campaign well on track. Its revenue projection for FY 2018 may appear to be a little ambitious at first, but when you assess it closely then it looks realistic, especially based on the company’s historical achievements and the project pipeline.
Therefore, investors should not be fazed by the company’s high P/E multiple while the recent decline in price to about $90 per share, which came after hitting an all-time of high of $105.89, may have created a perfect opportunity to pounce before the price goes on a run again.
Disclosure: I have no position in any stock mentioned.
