Is Under Armour a good fit for investors?
TheStreet’s Brad Ginesin thinks so.
“Under Armour's (UAA) stock has seen four upgrades to 'buy' since the start of the year, the most recent one from Morgan Stanley,” Ginesin wrote recently on Real Money. “Since the strong earnings reported in November, UAA has had a healthy 25% pullback, and analysts see a buying opportunity.”
The shares of Under Armour have historically traded at a rich valuation, with high growth expectations and a high price-to-earnings multiple to match.
“After refocusing on profits over ‘growth at any cost,’ the valuation has compressed, and the stock trades at a reasonable 24-times consensus earnings per share for 2022,” Ginesin said. “Pre-Covid, the shares traded with a multiple between 35-times and 65-times. Cash flow is at record levels, two years into the new CEO's tenure.”
Morgan Stanley believes UA can outperform its global sportswear peers this year, thanks to four factors:
--- Lower relative supply chain risk
--- The likelihood of relative outperformance in China sales trends compared to global peers who may still be feeling the effects of the 2021 cotton controversy/boycotts
--- Industry channel check momentum
--- And likely conservative 2022 guidance and expectations that leave room for upwardly revised EPS.
The company also has healthy business partners.
“The two largest retailers of UA's wear, Dick's Sporting Goods (DKS) and The TJX Companies (TJX), have remained among the stronger retailers,” Ginesin said.
“They've improved pricing power through brand elevation and streamlined its expense structure through a more efficient operating model. E-commerce and direct-to-consumer have increased markedly since 2019,” Ginesin added.
Overall, UA offers a good risk/reward, given the steep pullback, with business momentum continuing and the shares reasonably priced with a P/E in the mid-20s.
“Analysts make a good case that buying ahead of fourth-quarter earnings and a strong year-ahead should be no sweat,” Ginesin added.
At the time of publication, Ginesin was long Under Armour.
