Bullish Outlook for Under Armour Inc (UA)

Retail Sales and Gross Margins

The apparel sales through the retail outlets contribute roughly 75% to the overall stock price. Hence, it is imperative to highlight that going forward this facet of the business will be a key driver for the company. If the company exceeds its 2013 guidance for apparel sales, then there may be an upside on the current trading price. The performance apparel of Under Armour is the market leader in the segment with a staggering 70% share. This segment has been a key contributor towards its success; on the contrary, the footwear and accessories business unit will find it tough to capture more market share, as it faces a stiff challenge from industry giants like Nike and Adidas.

In addition to this, the gross margins must be consistently maintained as we move deeper into 2013. Historically the gross margins have been above the 50% mark; however, in 2012 it dropped to 47% approximately. If the company manages to push the margins back to 50%, then we expect the upward trend for its stock to continue. Furthermore, if the gross margins reach 60% then the stock price could witness an even sharper upward rally. On the contrary, if the gross margins remain on a similar level to 2012, and the company fails to report the expected growth in earnings, then there could be a steep downside in the stock price.

Higher Intrinsic Value

With good numbers in the last few years and a decent outlook for 2013, the current share price of Under Armour may be slightly undervalued. The most astounding element has been the revenue growth since 2009.  The company recorded 176% compounded annual growth in its revenues since 2009. According to Trefis, the company is expected to increase its FCF (free cash flow) in the next five years. This implies it will gradually reduce its CapEx as the positive impact from initial investments start to kick in, thus a higher valuation for the firm and a skyrocketing share price. If the company can achieve the planned growth in its FCF, then using the DCF model it can be easily established that Under Armour is currently undervalued. The growth witnessed in the performance apparel segment has been exceptional, and going forward we only expect it grow with possible expansion to other markets such as Asia, Europe and Latin America.

The article Bullish Outlook for Under Armour originally appeared on Fool.com and is written by Sujata Dutta.

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