Under Armour CEO Selling 2 Million Shares: Red Flag?
Image source: Under Armour.
Under Armour (NYSE: UA) (NYSE: UA-C) stock fell by nearly 3% on Monday, as investors sold off the stock on news that the company's founder and CEO, Kevin Plank, is planning to sell nearly 2.075 million shares of Under Armour. Is this a big reason for concern?
The context
Corporate executives can have all kinds of valid reasons to sell a stock, and portfolio diversification is usually a key consideration. Top-level executives usually receive a considerable part of their annual compensation in shares of the company. If they never sell, the stock can account for a disproportionate share of their overall portfolio.
Having both your salary and your investing portfolio depending too much on a particular company can be excessively risky, and most financial advisors typically recommend avoiding those kinds of situations.
In fact, when looking at insider activity for most companies in the market, insider selling is far more typical than insiders buying the company's stock. This can be for a variety of reasons, including cash needs or simply diversifying the portfolio. The main point is that when an insider is selling, it doesn't necessarily mean the executive is losing confidence in the future of the business.
That being said, Plank's decision to sell involves a considerable amount of money, 2.075 million shares at a current market price of $39.3 per unit would mean roughly $81.5 million. Besides, the move comes in a very particular time for Under Armour, as the stock is down by over 18% in the last year.
The company is firing on all cylinders on the revenue front: Under Armour produced $1 billion in revenue during the second quarter of 2016, an annual increase of 28%. For the full year 2016, management is expecting sales to increase by approximately 24% year over year. On the other hand, Under Armour is aggressively investing for growth, and this is hurting profit margins. In addition, Under Armour took a $23 million impairment related to the liquidation of Sports Authority last quarter.
That Kevin Plank is selling lots of Under Armour shares in times when the stock is performing badly thanks to shrinking profit margins is understandably raising some eyebrows among investors in the company.
The details
On August 31, 2016, Kevin Plank entered into a pre-arranged trading plan to sell nearly 2.075 million shares of Under Armour class C common stock over nine months. This includes 1.875 million shares in Plank's personal portfolio and 200,000 shares held by his charitable foundation. According to the official SEC filing from Under Armour: "The sales under the trading plan are being done for asset diversification, tax and estate planning, and charitable giving purposes."
Under Armour has three different kinds of shares outstanding, with dissimilar voting rights: Class A stock has one vote per share, class B shares have 10 votes each, while class C shares have no voting rights at all.
Kevin Plank currently owns 15.6% of Under Armour's total shares outstanding, including the three different kinds of stock. Even after the transaction is fully completed, Plank will still own 15.2% of the company's capital.
In terms of voting power, Plank beneficially owns 15.9% of the class A and class B common stock outstanding, representing nearly 65.3% of the combined voting power of the company's outstanding shares. Since he's not selling any class A or class B stock, Plank will fully retain his voting rights.
Should investors be worried?
It's never nice to see a CEO selling stock in the business he's running, especially when it's a big transaction and the stock is down materially over the year. Nevertheless, it's important to see things in perspective.
Even after selling more than 2 million shares in the company, Plank will remain enormously invested in Under Armour, not only financially, but also in personal terms. Kevin Plank created Under Armour from his mother's basement in 1996, using his personal savings and credit card debt. Since then, he has grown Under Armour into a business worth nearly $17.45 billion in market value and growing at full speed.
This is probably about much more than money for Kevin Plank at this stage. Besides, he will still own over 15% of the company's capital and more than 65% of the voting rights. Investing in Under Armour means investing in Kevin Plank to a good degree, and that's not going to change after this scheduled stock sale.
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Andres Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Under Armour (A and C 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.