Dear Mr. Market –

Throughout 2014 consumers have proven that they can be extremely fickle, looking for superior products at the best possible price. They have been very selective how they spend their hard-earned money forcing companies to be both creative and resourceful. When looking at consumer discretionary companies returns have been all over the board, separating the contenders from the pretenders. For a company to be successful they must provide a superior product with quality service at a competitive price. When it comes to the sporting goods/apparel industry there is a relatively young company that has emerged as a leader and is playing ball with the big boys.

Under Armour (UA) has burst onto the sports/fitness industry scene over the last decade. With bold marketing and innovative products they have become a force and have caught investors attention. UA is up over 34% YTD and has left many of its competitors in the dust: Nike (NKE, YTD =-1.87%), Lululemon Athletica Inc. (LULU, YTD = -33%), Adidas (ADDYY, YTD = -24%) and Columbia Sportswear (COLM, YTD = +3%). With impressive numbers like this investors are forced to ask themselves if the stock still has positive upside or if it is too late to take a position?

Company Summary:

The company was created in 1996 when CEO Kevin Plank began selling his synthetic fabric performance t-shirts up and down the East Coast out of the trunk of his car. Plank played football for the University of Maryland excelling as the captain of the Special Teams unit. During his playing days he looked for a shirt different from the cotton t-shirts that the team wore that often required them to change several times during two-a-day practices. When he couldn’t find a product that fit his needs he set out to create one. The first shirt was named #0037, after the jersey he wore in his playing days. The following year he introduced ColdGear fabric and quickly realized the company would outgrow the space it occupied in his grandmother’s basement. In 1998 the company moved to its current headquarters in Baltimore, MD.

Today Under Armour, Inc. is a leader in the sports apparel industry, offering clothing, footwear and accessories for men, women and youth.   They are engaged in developing new products, marketing and distribution of their products on a worldwide basis. They offer equipment for a wide variety of sports: football, baseball, basketball, lacrosse, softball, soccer, hunting and the outdoors. The company sells its products through wholesale channels, sporting good chains, specialty and independent retailers a network of factory owned outlets and their website.

Fundamental View:

Under Armour posted an impressive first quarter to start out 2014. The company’s revenue grew by 36% and earning per share grew by more than 70%, both numbers exceeded what analysts were expecting. The stock price however did not respond well as analysts said the future guidance was much too low based on the reported numbers, the stock dipped nearly 10% shortly after reporting quarterly data. Revenue came in at $642 million beating the prior years number of $472 million by over 35%. Net income increased an impressive 73% from the prior year ($14 million vs. $8 million) resulting in earnings of 6 cents per share compared to 4 cents in 2013. While the numbers were certainly impressive, the future guidance was not received well by investors. The general consensus was that the outlook was much too conservative. With 33% growth in revenue for the first quarter it is interesting that management only came in with full-year guidance of 1% to 2% over 2013’s numbers.

During the release of the 1^st quarter numbers Kevin Plank stated, “We are off to a great start in 2014 driven by broad-based strength across our apparel, footwear, and international growth drivers. Our formula for driving newness and innovation in apparel continues to resonate with consumers and helped deliver over 30% growth for our largest product categories”. He also stated that the company has enhanced its expansion into several key markets – Latin America, Europe and Asia. We believe UA’s international opportunities are what can take the stock to another level.

In April the stock went through a 2-for-1 stock split; only the second stock split by the company, the previous one took place in July 2012. The stock split appeared to put to rest concerns that surfaced during the winter Olympics in Sochi, Russia. The U.S. speed skating team had a very poor showing and much of the blame was pointed towards the Under Armour high-tech outfits that they wore in competition. The stock price dipped slightly but the company stayed focused and stood by their product and committed to sponsoring the team through 2022.

The stock is currently trading just under $59 per share at $58.97 with a 52-week range of $29.73 to $62.40. A number that catches many investors attention is the robust P/E that the company posts – it is currently at 76.57. This number is significant when compared to its key competitors: Nike at 25.98, Lululemon Athletica at 22.90 and Columbia at 26.79. The Forward P/E for UA is 50.63 while its competitors are at: NKE at 19.95, LULU at 19.68 and COLM at 20.89. While there is certainly a considerable difference it is important to realize that while these companies are UA’s competitors, they are in significantly different positions in terms of size, business life cycles, and company development.

Nike is by far the leader in the industry and is 10 times larger than Under Armour based on revenue. Based simply on the size of the two companies it is easy to see that UA has the ability to post significantly higher growth potential in the coming years. We like NKE and view it as a long-term investment but we are hesitant when comparing the athletic giant to UA on a one to one basis. Over the last 16 quarters Under Armour has posted 20% or more growth for every earnings announcement.

Technical View:

Currently the stock is trading well above it’s 200 day moving average (click here for chart) which is not surprising when taking into consideration the run that is has been on. Investors that have been able to add UA to their portfolio when it dips down towards the 200-day MA have been rewarded with impressive returns.

As of this writing all of the technical indicators that we follow are bullish. The relative strength, 50 and 200-day moving averages, and the MACD (Moving Average Convergence Divergence) are showing positive indications to continue a Bullish Trend. The Up/Down volume pattern also shows that the stock is under an accumulation phase. One thing to keep in mind with UA is that it sports a beta of 1.69 so it will obviously tend to be more volatile than many of its peers. In summation though, UA is a buy if you’re looking at it from just a technical and charting perspective.

There are over 30 different analysts offering opinions on Under Armour.   Currently there is one analysts that has the stock rated with an ‘underperform’, 17 with a ‘hold’ and 12 with a ‘buy’ or ‘strong buy’ rating. The stock has been a market darling the last several years with impressive performance but should you buy, sell, or hold it going forward?

Buy, Sell or Hold?

This leads us to the ultimate question regarding UA: Is now the time to invest or has this ship already sailed? Perhaps the ultimate question to ask is can the company continue to generate bottom line growth to justify its healthy valuation?

We would suggest that with the dynamic management team on board that the company has room for substantial expansion moving forward. In the last quarterly report the company highlighted three markets that offer exciting opportunities: outdoors, golf and running. Kevin Plank was recently quoted as saying, “Whether it’s categories like running, golf and outdoor, key growth drivers like women’s and footwear, early stage businesses like basketball and Connected Fitness or new markets like Brazil and China, it’s equally clear that the opportunities for the Under Armour brand are abundant and our philosophy around growth is unchanged.” Approximately 90% of company revenues come from North America but there is massive growth potential in foreign markets like: China, Brazil, Chile and parts of Europe where UA is developing a following. The management team is the driving force for this company and there is no reason to think that they cannot continue to push this company forward in the coming years.

When looking at adding UA to an investment portfolio we would suggest that investors take advantage of any pull back in the stock price. There will certainly be profit taking in a name like this and the 3-year chart shows that disciplined investors have been rewarded when strategic entry points are presented. We would also suggest that UA be viewed as a long-term hold once a position is taken. With expansion into new markets and sports, shareholders should be rewarded but penetration can take time and results are not instantaneous. Our thoughts on Under Armour are not a blanket ‘recommendation’ for investors, it is important to remember that we are not aware of your personal situation or risk tolerance. If you are considering adding Under Armour to your portfolio and would like to see other specific recommendations along with a comprehensive analysis, we would encourage you to contact us via the form below or call us at 888-47-GUIDE.