Under Armour's (UAA) stock has seen four upgrades to buy since the start of the year, the most recent one from Morgan Stanley (MS) on Wednesday. Since the strong earnings reported in November, UAA has had a healthy 25% pullback, and analysts see a buying opportunity.
The shares of Under Armour have historically traded at a rich valuation, with high growth expectations and a high price-to-earnings multiple to match. After refocusing on profits over "growth at any cost," the valuation has compressed, and the stock trades at a reasonable 24-times consensus earnings per share for 2022. Pre-Covid, the shares traded with a multiple between 35-times and 65-times. Cash flow is at record levels, two years into the new CEO's tenure.
The MS analyst believes UA can outperform its global sportswear peers this year; four factors are cited: lower relative supply chain risk, likelihood of relative outperformance in China sales trends compared to global peers who may still be feeling the effects of the 2021 cotton controversy/boycotts, industry channel check momentum, and likely conservative 2022 guidance and expectations that leave room for upwardly revised EPS.
The analyst also thinks the recent stock weakness may have been caused by holiday weakness in specialty retail. But the analyst argues the weakness is unwarranted and ignores Under Armour's differentiated model and product exposure. The two largest retailers of UA's wear, Dick's Sporting Goods (DKS) and The TJX Companies (TJX) , have remained among the stronger retailers.
BMO's analyst, who upgraded the shares in January, noted that UA has been quietly building a solid cash balance. Over the last five years, cash has increased by fivefold to $1.5 billion, now in-line with their debt which grew 50% in that timeframe. With the increasing balance sheet flexibility, they've calculated that repurchasing stock with excess cash could hypothetically drive greater than 10% EPS growth.
Citi also upgraded the stock to buy recently. The analyst thinks Under Armour is emerging from the pandemic in a much stronger position in North America, without excess inventory, distribution channels rationalized, and a solid product assortment. The analyst also believes UA is gaining traction internationally, and the shares are a bargain at about half the enterprise value / earnings before interest, taxes, depreciation, and amortization multiple to Lululemon Athletica (LULU) and Nike (NKE) .
Under Armour had record gross margins last quarter and among the best 3Q margin expansion and upward EPS revisions across the group as the company has continued to underpromise and overdeliver. They've improved pricing power through brand elevation and streamlined its expense structure through a more efficient operating model. E-commerce and direct-to-consumer have increased markedly since 2019.
The return of team sports and other recreational sporting events has been a tailwind somewhat offset by lingering Covid issues, supply chain bottlenecks, and inflation. Even though the company will have its best financial performance on record this year, the full benefits of operating efficiencies and improved brand performance lie ahead. Wall Street has yet to get on board the stock, missing that new management has dramatically improved the financial performance and business consistency.
UA offers a good risk/reward, given the steep pullback, with business momentum continuing and the shares reasonably priced with a P/E in the mid-20s. Analysts make a good case that buying ahead of fourth-quarter earnings and a strong year-ahead should be no sweat.