A couple months ago, a friend who is in the shoe industry sent me the type of e-mail I never get tired of -- a recommendation for a value stock. This one was about Under Armour (UAA) , which had just fallen 26% on Jan. 31 after reporting disappointing fourth-quarter results. Despite a record year in terms of revenue, which was up nearly 22% over 2016 to $4.825 billion, fourth-quarter revenue and earnings did not meet expectations, and let's face it, that's what the market really cares about.
It has been a rough ride recently for the stock, which is down 53% over the last 12 months and 34% year to date. That's part of the reason my friend mentioned the opportunity. With UAA at a four-year low, it must be cheap, the thinking goes. However, my astute friend also noted that the stock was probably over-inflated to begin with.
How Under Armour was founded and prospered is a great American success story. If you've never heard CEO and founder Kevin Plank tell his story about the genesis of the company, it is a wonderful example of entrepreneurship and ingenuity and he is a very impressive guy. He is a true success story. It's hard not to believe that this company, despite recent stumbles, will continue to prosper.
However, that certainly does not make Under Armour a cheap stock. Despite the punishment it has taken over the past year, UAA still trades at 45x trailing earnings. Consensus estimates for 2018 put the forward price/earnings multiple at 38. Now, that may be a cheaper multiple than Under Armour historically has commanded, but that is not the same thing as cheap. Don't forget that the sports apparel business is very fickle and competitive and consumer tastes always are changing.
Under Armour shares likely will get a bump in today's trading following a favorable weekend Barron's cover story that suggests UAA could rise 30% this year. An increase of the size would put UAA in the $26 range, if Barron's is right, still well below the nearly $50 a share it commanded less than two years ago.
Knowing the story and the beating that UAA has taken, it is a stock that I wanted to like. I really like the company. However, Under Armour simply is not cheap, in my view. Net profit margins, which were in the 6.4% to 7% range between 2010 and 2014, fell to 5.9% in 2015 and 5.3% in 2016.
There's often a disconnect between price and value, and that's what the market attempts to rectify over time. I'm just not sure that UAA is there yet. This is another example of liking a company but not the stock. The two are not always the same thing.