- Under Armour stock price has fallen by one-third in the last three months, while Nike stock has gained.
- Rumors that it would buy Lululemon, and a change in investment fashion have both contributed to this fall.
- Buying previously in weak periods led to spectacular rewards.
Judged just by the behavior of his stock, Under Armour (NYSE:UA) founder Kevin Plank should probably be fired. But don't even think about it.
Just in the last three months, UA stock has fallen by 37%. Over the last six months the shares are down a full 19% while those of arch-rival Nike (NYSE:NKE) are up 6.7%. Analysts are pounding the table for Nike and telling investors to leave Under Armour stock strictly alone.
So is Under Armour in trouble? No. Investing fashions have changed. People prefer dividends and stock splits to growth. Under Armour is killing it on growth. During the three months ending in September, when it was shipping its Christmas season merchandise, the company brought in revenue of $1.2 billion, 28% ahead of the year-ago period, and 53% ahead of the previous quarter. Operating margins rose on the higher revenue, and net income came in at $100 million, up from $15 million the previous quarter.
Under Armour’s balance sheet has weakened in dealing with this growth, with total debt now at $904 million on assets of $3.04 billion. But only 62% of that debt is long-term debt. Most of it is the usual short-term capital taken out to fuel manufacturing.
Despite the changing financial fashions Under Armour is still growing faster than Nike, its margins remain comparable, and its strategy for gaining further remains in place. I suggested almost two years ago that Under Armour should buy Lulu (NASDAQ:LULU) and chatter about just that has been heating Lululemon stock for months, with Nike also presumably considering a bid. This has had the effect of raising the price of LULU while hitting that of Under Armour stock, as often happens during merger talks.
Lululemon could offer far more to Under Armour than to Nike, which already has a direct-to-consumer strategy through its Nike stores. Lululemon designs and manufactures its own clothes, tries hard to match supply and demand to avoid putting goods on sale, and delivers its yoga outfits through its own stores, maximizing profits. Lululemon also skews heavily female, UnderArmour heavily male, and a deal would balance that out.
Still, these are still just rumors. No deal has been done. The resulting fall in Under Armour stock still doesn’t make it a bargain – the Price/Earnings ratio is nearly 75 and even if it delivers $4 billion in sales this year you’re paying almost four times that for the stock. But this is a much better entry point than you have seen in some time, and the stock has split twice since 2012, tripling Nike’s gains between the start of 2011 and Under Armour’s peak in the middle of last year.
If you’re interested in this growth story, in other words, now may be the time to pounce on it.