Why These Under Armour Stock Upgrades Are On Point

By Markets Fool.com

The Curry basketball shoes, one reason Under Armour footwear has been so impressive. Image source: Under Armour.

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Over the last week, Under Armour (NYSE: UA)(NYSE: UA-C) stock has been upgraded by analysts at both Wells Fargo and Piper Jaffray with a price target of $44. That would be a gain of about 16% from the stock's price of around $38. Here's why these analysts are bullish and what investors might expect from its upcoming Q3 earnings.

Why analysts are loving Under Armour right now

The Piper Jaffray analyst wrote that shares are "poised for reaccelerated global growth" based on increased traction in apparel and footwear. Wells Fargo's analysts moved their Under Armour stock rating to "outperform," saying that new partnerships such as the one with department store Kohl's (NYSE: KSS) as well as potential in footwear market share gains and international growth bode well for the company.

Perhaps the biggest reason analysts are loving Under Armour stock is that it has dropped about 24% over the last year, which could make for an attractive entry point now for such a high-growth company. Much of the reason for the drop in the last few quarters is not because of slowing sales, which grew 28% year over year in the most recent quarter, but because of the Sports Authority bankruptcy earlier this year, which has hurt earnings.Sports Authority was one of Under Armour's bigger retailers, and its sudden and unexpected demise led to Under Armour writing off a $23 million operating profit impairment in the most recent quarter.

This shouldn't pose much of an issue long term. There doesn't seem to be a problem with demand for Under Armour products, based on the growing sales and that itsown direct-to-consumer business has grown substantially in recent quarters. Sports Authority's failure also seems isolated as its competitors like Dick's Sporting Goods (NYSE: DKS) are thriving. Therefore, the short-term worry about Under Armour's earnings loss could be a great opportunity for investors looking for a discount on a high-growth company.

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What investors should expect in the coming quarter

Under Armour will announce Q3 earnings on Oct. 25. Sales are likely to continue to grow in the mid-to-high 20% range year over year. Under Armour plans to reach just under $5 billion in sales for the year, which would be about a 25% jump over 2015.E-commerce and footwear should continue to impress, but one interesting point to watch is the growth in international sales.

International sales grew 73% year over year in Q2, to now make up 15% of the company's total.Since Under Armour had such a successful showing at the 2016 Olympics in Rio, with its sponsored athletes like Michael Phelps and Team USA Gymnastics creating worldwide media buzz, we should expect international sales to get a sizable boost.

Part of Under Armour's Lighthouse manufacturing innovation center. Image source: Under Armour.

However, what investors should not expect is a big jump in income. Under Armour posted earnings of just $6 million in Q2, a 58% drop year over year, largely related to the Sports Authority bankruptcy. Because the impact of that bankruptcy is waning, Q3 earnings should certainly look better -- but not by much.

Under Armour is making big investments, which has only ramped up in the last year with the introduction of an entire Connected Fitness hardware line, a manufacturing innovation hub, new offices around the world, and much more. Therefore, year-over-year income growth is likely to be small as high development and demand-generation costs keep profit margin low. It's these investments that have made Under Armour such an impressive growth story in recent years, and that is what's behind the thesis that Under Armour stock looks like a great long-term play.

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Seth McNew owns shares of Under Armour (A Shares), Under Armour (C Shares), and Wells Fargo. The Motley Fool owns shares of and recommends Under Armour (A Shares), Under Armour (C Shares), and Wells Fargo. 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.