Under Armour Inc (UA): “I Will,” or Maybe I Won’t

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%.