Last week I told you guys about a safe international investment in Australian government bonds. Today I'll turn my attention back to the stock market to talk about a stock that I believe has some decent growth potential in the next few years.
Under Armour Inc (UA), currently trading at $69.45 on the NYSE before the open on Monday, March 14th is a stock that has a considerable amount of growth potential. If you have never heard of Under Armour, tune in to the upcoming NCAA tournament and I'll guarantee you'll see quite a few commercials promoting their form-fitting, temperature resistant clothing that has become a staple for many athletes' wardrobes. CEO Kevin Plank and co. have done an excellent job cutting out a niche market in the retail sector, providing a unique product and establishing a brand name that is synonymous with high quality and performance.
A quick visit to their website can tell you everything you need to know about their cutting-edge technology, their top of the line innovation, and the bright future of new products they have coming down the pipeline. The bear voices on Under Armour have been making the same complaints for years, that the company’s product is easy to imitate, and that Nike could easily use its massive $41 billion market share to push them out of the market. Those predictions were being made since Under Armour’s IPO in 2006, and since then the company has done nothing but prove them wrong, with a nearly 300% increase in stock price since its inception.
Looking at the financials, UA is a solid company, well-run and with excellent cash flow. The company was one of the quickest to recover from the recession, posting increases in profits the past three years and solid revenues every quarter. The company’s gross margin is nearly 50%, above its competitors in Nike and Adidas, and has quarterly revenue growth of 35%, compared to Nike’s 9%. In addition Under Armour has a low debt to equity ratio for the industry at 3.21% and a considerable amount of cash stored away to fund new research and development programs. Overall, the company is run by a young group of directors who have proven themselves as able managers leading a company with growing sales and popularity.
On the public relations front, Under Armour has gone out and secured some of the most famous professional athletes to endorse their product. Last year NFL quarterback Tom Brady and Olympic swimmer Michael Phelps signed endorsement deals with the company, and at the beginning of this year, quarterback Tim Tebow signed on to the cause. In addition to promoting their most popular line of synthetic tops and sweatpants, Brady and Tebow will also be the spokesmen for the new line of cleats that Under Armour plans on rolling out within the next few weeks. This marks another foray into the footwear market, where the company’s original shoes have been decent revenue supports to their main apparel line. In addition to increasing domestic sales, Under Armour has seen revenue growth across the world, and is becoming a worldwide brand for athletes in all sports.
To sum it all up, it looks like Under Armour still has a few years of strong growth left in them, and is considerably undervalued because of all the naysayers who believe their product can be replaced. Ask any athlete who has ever used an Under Armour product and they will tell you there is nothing that can compete with their top-of-the line apparel. I estimate a target price of around $87-$90, so keep an eye on this stock and find a good time to get in before it is too late. As an aside, if you are worried about the retail industry as a whole, you can offset this risk by shorting another company in the industry. My suggestion would be Skechers (SKX), they have never had the revenues to support their current price of $19.65, and if the industry takes a turn they will be one of the first to drop. Going long crude oil may also be a good way to hedge against a rise in the cost of shipping.
DISCLOSURE: I do not own nor manage any portfolio that contains the stocks or commodities mentioned above.
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