I have a difficult time not buying stock in companies when I buy their products on a regular basis. One such company is Under Armour Inc (NYSE:UA). My personal experience with Under Armour clothing and shoes is that they are very high quality and very comfortable. In fact, since my wife and I tried Under Armour shoes, we have recommended them to almost everyone we know. However, recommending Under Armour Inc (NYSE:UA) stock is a little more difficult.
This Is a Great Company That Could Do so Much Better Don’t get me wrong--I’ve owned Under Armour stock in the past, and been very pleased with the results. However, once the stock gotten past a certain valuation, I could no longer justify continuing to own the shares at such lofty prices. There are several issues facing Under Armour Inc (NYSE:UA), and in an industry with competition such as Lululemon Athletica inc. (NASDAQ:LULU) and NIKE, Inc. (NYSE:NKE), the company can’t afford to be second best at anything.
When a company reports revenue growth of 23%, and this is evenly spread across each of their divisions, you would expect good earnings growth as well. However, due to promotional spending and incentives, Under Armour saw a 50% decline in diluted EPS. For a stock selling at a forward P/E ratio of 40.51, a decline in earnings like this should be a red flag.
Consistency in Revenue and Earnings Growth The first thing investors need to keep an eye on is Under Armour Inc (NYSE:UA)'s earnings growth rate. Currently, analysts expect the company to grow earnings by just less than 21% in the next few years. In past quarters, the company exceeded 20% earnings growth. However, looking at the 50% decline last quarter, investors need to see if the company can get back on track.
When you look at Under Armour's peer group, Lululemon Athletica inc. (NASDAQ:LULU) is expected to grow earnings faster than Under Armour at 22.24%, versus 20.83%. NIKE, Inc. (NYSE:NKE) isn’t expected to grow as fast as these two companies at about 10% EPS growth, but Nike is also a much larger company as well.
It’s acceptable for the company to show a large decline for one quarter based on certain expenses, but if this becomes a trend, Under Armour Inc (NYSE:UA) would be in serious trouble.
A second item to watch is continued momentum in revenue growth. Analysts are generally expecting an over 22% increase in revenues this year from the company, and anything less would be a major blow to investor’s confidence. In fact, Under Armour is expected to grow revenue faster than Lululemon, from which analysts expect 21% revenue growth. In contrast, NIKE, Inc. (NYSE:NKE) is only expected to grow revenue by 4.9%.