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Week Low, Under Armour Is A Buy

Time:2016-11-17 16:58Shoes websites Click:

under Week Armour

Under Armour (NYSE:UA), much to my own detriment has been a stock that I have avoided over the years, always due to "valuation."I've made the wrong choice for effectively the last 7 years. I wrote in June that heavy near-term spending would weigh on operating margins, but that I would be interested in shares below $30. Well, the Class C shares (NYSE:UA.C) currently trade below $30 and the A shares are trading at just $32, so I decided to dig into the company and make a call. While I anticipate a discount between the two shares classes to persist, I value the A shares at $47 with a range of $44-52 dependent upon different sensitivities and cases. Shares look attractive at current levels and I'll be initiating a position in my portfolio.

Value Drivers

An updated view on revenue growth: UA is in the early innings of building a robust international business

Looking back at my previous work, I think I got one thing wrong: international expansion.

Revenues

 

2012A

 

2013A

 

2014A

 

2015A

 

2016E

 

North America

 

1,726.7

 

2,193.7

 

2,796.4

 

3,455.7

 

4,085.0

 

International (Excl.Connected Fitness)

 

108.2

 

137.2

 

268.8

 

454.2

 

754.6

 

Connected Fitness

 

-

 

1.1

 

19.2

 

53.4

 

85.1

 

Click to enlarge

Source: UA SEC Filings

International revenue has grown at 60%+ CAGR since the company started breaking out international results in 2012, and it has greatly accelerated recently. In the first three quarters of 2016, international revenue has grown 56%, 68%, and 74%, respectively. This is a broad-based story as the company has invested heavily in European sponsorships while the popularity of Stephen Curry and the developing running market has driven China to more than double in 2016. The company is investing heavily in global capabilities, and I think the company will vigorously attack markets where competitors like Nike (NYSE:NKE) and adidas may be riding on their coattails.

Under Armour will have a very compelling story to market to Chinese consumers in Stephen Curry. China probably has more NBA fans than the United States, and I think the consumers will continue to connect with his unique style of play. Further, I think winning championships with the arrival of Kevin Durant will not hurt his popularity as the many stipulate. In fact, it may elevate his status amongst Chinese consumers. Stories build brands, and Curry will be fundamental to Under Armour's China growth story.

International growth is going to be equally as important to Under Armour as North America will in driving the growth story. I think this business grows to $7-8 billion over the next decade.

Working capital management will improve to help drive free cash flow

Like many smaller, high-growth companies, Under Armour is sucking up working capital. However, my analysis has revealed that Under Armour has been particularly poor at managing inventory growth, as well as payables.

Working Capital Management

 

2010

 

2011

 

2012

 

2013

 

2014

 

2015

 

Inventory Turns

 

2.5x

 

2.3x

 

3.0x

 

2.5x

 

2.9x

 

2.6x

 

AR

 

35.0

 

33.2

 

34.9

 

32.9

 

33.1

 

39.9

 

AP

 

57.9

 

48.3

 

54.9

 

50.5

 

48.9

 

35.6

 

Click to enlarge

Source: DB, SEC Filings

Receivables collections times are fine, and in-line with industry standards, but Under Armour retires its payables relatively quickly, and it's inventory turnover historically been poor and greatly trails Nike. I have this as a moderate risk to value creation, particularly if Under Armour's inventory builds result in steeper mark-downs if/when they experience a trend miss.

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