Is Under Armour Inc (UA) Destined for Greatness?

Under Armour Inc (NYSE:UA)Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Under Armour Inc (NYSE:UA) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Under Armour Inc (NYSE:UA)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at Under Armour Inc (NYSE:UA)’s key statistics:

UA Total Return Price Chart

UA Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 116.8% Pass
Improving profit margin 17.7% Pass
Free cash flow growth > Net income growth (8.7%) vs. 155.2% Fail
Improving EPS 140.4% Pass
Stock growth (+ 15%) < EPS growth 308.70% vs. 140.4% Fail

Source: YCharts.
*Period begins at end of Q2 2010.

UA Return on Equity Chart

UA Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 24.9% Pass
Declining debt to equity 72% Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going
Under Armour Inc (NYSE:UA) doesn’t hit the finish line at a sprint, as it’s earned only four out of seven possible passing grades. The company’s top and bottom line have both grown significantly, but free cash flow hasn’t been able to catch up with the trend, and none of Under Armour’s fundamentals can match the rise in its share price at any rate. How might Under Armour pull its earnings and free cash flow back in line with sky-high stock prices? Let’s dig a little deeper to find out.

Under Armour Inc (NYSE:UA) has been facing tough competition in the brutally competitive sportswear niche, but the company has thus far held its own quite well. Under Armour Inc (NYSE:UA) recently grew its apparel sales by 23% — since this segment still accounts for three-quarters of revenue, it’s vitally important that it maintain momentum.

While the company has been an undisputed leader in “compression-wear,” a segment it all but invented, Under Armour continues to expand its horizons in areas where it has been either struggling or non-existent. Under Armour has targeted amateur baseball and football players (who certainly buy more shoes than the small group of elite professionals) with a line of sport-specific cleats.

The company has also signed a marketing contract with Tottenham Hotspur, which will boost Under Armour’s sales as the rising soccer (or football, for true fans) team continues to win hearts worldwide. A recent agreement with Chilean soccer team Colo-Colo also helps the brand penetrate Latin America. Nearly all of the company’s sales are in the United States, so smart international branding opportunities must continue apace. At present, Under Armour Inc (NYSE:UA)’s international sales account for only 6% of the company’s revenue, but overseas buyers are expected to comprise about 12% of revenue by 2016.

Putting the pieces together
Today, Under Armour has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy — or to stay away from a stock that’s going nowhere.

The article Is Under Armour Destined for Greatness? originally appeared on and is written by Alex Planes.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Under Armour.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.