How Risky Is Under Armour Inc Stock?

By Markets Fool.com

Shares of Under Armour (NYSE: UA) have fallen 13% over the past 12 months on concerns about its slowing sales growth, declining margins, high valuation, and its ability to keep pace with bigger rivals like Nike (NYSE: NKE). Should investors go against the grain and buy UA as a contrarian investment? Let's examine its growth rate, valuations, and headwinds to see how risky the stock is at current prices.

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Image source: Under Armour.

How fast is Under Armour growing?

UA posted 27.6% annual sales growth lastquarter, which represented a slowdown from 30.4% growth in the previous quarter and 28.5% growth a year earlier. That growth merely matched analyst estimates, ending the company's streak ofeight consecutive top line beats. UA expects its full-year revenue to rise 24% this year, compared to 28% growth in 2015.

A major weight on UA's top and bottom lines during the quarter was the bankruptcy of retailer Sports Authority. That bankruptcy caused UA's net income to plunge 58% annually to $6 million last quarterdue to a $23 million operating profit impairment from the retailer's liquidation.

On a per share basis, UA reported a loss of $0.12 for its Class A (regular shareholders') and Class B (CEO Kevin Plank's) shares due to the dividends paid to Class C shareholders during the quarter. The non-voting Class C shares were approved in late March as a one-for-one dividend to Class A and B shareholders. In June, Under Armour announced a special $59 million dividend for Class C shareholders tosettle a shareholder suit against the company.If that dividend hadn't been paid, UA would have reported non-GAAP earnings of just $0.01 per share, matching analyst estimates.

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High valuations and major headwinds

The big problem with UA is that it still trades at high multiples after its year-long decline. Its trailing P/E of 38 is much higher than Nike's P/E of 27, Adidas' P/E of 34, and the industry average of 26 for footwear makers. Analysts expect UA's earnings to fall almost 50% this year due to the aforementioned problems, which makes its valuation look unsustainable.

UA admitted last quarter that its gross margin would be "down slightly compared to last year" due to lower revenue growth. It also expects its operating margin to decline as it boosts its SG&A (sales, general, and administrative) spend by 28% to match Nike's and Adidas' marketing might. That move indicates that UA is likely worried that Nike's best-selling LeBron James and Kevin Durant shoes could take a big bite out of its Steph Curry shoes in the high-end market. To make matters worse, theCurry 2 was roasted on social media in June, with users comparing the plain white shoes to footwear for nurses.

UA's recent moves,like its move into the old FAO Schwarz building on Fifth Avenue in New York, indicate that it's eager to match Nike's brick-and-mortar presence and move beyond the Sports Authority disaster. It also signed a new distribution deal with Kohl's, which already carries Nike merchandise. But engaging in a prolonged marketing battle against Nike could be very tough on UA's margins, since Nike has much deeper pockets and economies of scale on its side:

Weak cash flow, rising debt, and rising short interest

UA's cash and equivalents fell 19% to $121 million last quarter, and its total debt rose 42% to $1 billion. The company's free cash flow has also declined rapidly over the past three years.

Source:YCharts

This nasty combination of slowing sales, high valuations, declining margins, negative cash flows, and tough competition have made Under Armour a popular target for short sellers. 24% of UA's float was being shortedas of Aug. 24. By comparison, just 1.6% of Nike's shares were being soldshort.

Not enough tailwinds to lift this stock

Consumers are clearly still buying UA footwear and apparel, but the valuations don't support its stock price anymore. Unless UA can accelerate its sales growth while boosting its margins and cash flow again, I believe that the stock remains far too risky as a long-term investment.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike and Under Armour (A Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.