have endured two significant declines over the past 12 months, falling once in October 2016 and again in January 2017. As a result, the stock is down 45 percent over the trailing 12 months and 27 percent year to date as of May 2017. If companies still have strong long-term fundamental potential, such declines can be great opportunities for value investors, so this is an interesting stock to analyze from that perspective.
Under Armour has delivered consistent high revenue growth. The top line expanded at least 18 percent in every year since 2007, topping out at 38 percent in 2011. The company's five-year average sales growth was 26.8 percent in 2016. However, deceleration has become a threat to this strong trend. Sales rose only 7 percent in the first quarter of 2017, weighed down by North American sales, which actually declined 1 percent. (See also: Can Under Armour Make a Comeback?)
Under Armour has struggled on the gross margin line. That metric fell to a three-year low of 48.08 percent in 2016, having previously been as high as 50.3 percent. Gross margin declined 70 basis points to 45.2 percent in the first quarter of 2017. Mix and inventory management play major roles in short-term margin fluctuations, but price competition amid evolving consumer behavior continues to weigh on margins across most retail markets. Under Armour maintains a comparable gross margin to peers, falling within the range and trailing the group median by two percentage points. (See also: Under Armour Plays Catch Up.)
Under Armour's operating margin and net margin have trended negatively through 2016, hitting their lowest levels since 2009. Operating margin of 10.3 percent and net margin of 5.9 percent are each more than 100 basis points below recent highs. Margin contraction continued in the first quarter of 2017 as selling, general and administrative expenses rose. Company management anticipates a 5.9 percent operating margin for the full year after posting better-than-anticipated results in the first quarter. (See also: Under Armour Stock Up on Narrower-Than-Expected Q1 Loss.)
Asset turnover was 1.48 over the trailing-12-month period, hitting the lowest point of the decade. This means that the company has failed to maintain its ability to efficiently utilize its assets to generate sales. It is especially interesting because Under Armour's asset turnover ratio has declined while inventory turnover trended upward. While asset turnover has moved in the wrong direction for Under Armour, it is still strong relative to peers. It falls within the peer range and ahead of the average value of 1.23. Analysis of the company's efficiency ratios reveals a mixed bag, but the results are modestly positive on the balance. (See also: What Do Efficiency Ratios Measure?)
Under Armour passes basic financial health screens, although investors should be aware of the risk assumed in taking a position. The company's equity multiplier has been rising, and it is higher than the peer average as the company takes on debt in a low interest rate environment. This debt appears fully manageable, and there is no reason to assume that it will negatively affect shareholders, but it is worth considering the impact on equityholders in the unlikely event of liquidation. To that point, Under Armour has sufficiently high liquidity ratios, with a current ratio of 2.87 and a quick ratio of 1.27. Although these numbers are lower than the company's recent highs, they are still higher than industry peers. (See also: Liquidity Measurement Ratios.)
Under Armour has a more bullish growth outlook than its peers, and investors must pay a premium for shares. The stock is more expensive on the basis of price-to-book, price-to-earnings, forward-price-to-earnings, price-to-free-cash-flow, PEG ratio and enterprise-value-to-EBITDA. Unlike most of its peers, Under Armour does not pay a dividend, so it is not appropriate for income investors. (See also: Relative Valuation: Using Stocks to Value Other Stocks.)
Because Under Armour does not particularly stand out on most efficiency and health metrics, this stock's premium is purely for growth potential. This means that it is relatively high risk versus its peers and that the declining price did not shake out all of the speculation in the valuation. This cannot be considered a traditional value stock as a result, and investors should understand how the risk and upside potential for Under Armour fit into their portfolio. (See also: Valuation Problems Persist for Shares of Under Armour.)
By Ryan Downie
Source: Ihttps://goo.gl/wcRnM5
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