Is Under Armour Inc's Valuation Over-the-Top?

By Alex Dumortier, CFAFool.com

Source: The Motley Fool

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Under Armour was bucking the broader market on Tuesday morning, with the shares gaining as much as 2% courtesy of a raised price target, from $83 to $86, by broker FBR Capital. Under Armour closed yesterday at $77.29.

So what: FBR Capital's Susan Anderson argues for a higher price target on the basis of the potential of its footwear line:

It's not clear how "confidence in UA's growth trajectory" translates into a tenth of a point increase in its forward price-to-sales ('P/S') multiple, but that, in itself, raises the question of why FBR Capital is focusing on this specific multiple? The answer is probably that Under Armour's profits-based multiples look indefensible, with a price-to-earnings ratio of 83 and enterprise-to-EBITDA at 38.

Note that I'm not saying these ratios are necessarily indefensible, but they look stratospheric and are, therefore, difficult to use in building a compelling "buy" case for the shares.

Now what: I agree with FBR Capital that UA has already built a fantastic brand, which has tremendous value. Continuing to nurture that brand will be critical to further success, in terms of operating results, and, ultimately, for the stock. The shares have absolutely trounced the S&P 500 over the past five years (and from their November 2005 initial public offering).

UA data by YCharts

However, UA is unlikely to reproduce that performance over the next five years. Although I expect operating results to go from strength to strength, the stock's valuation looks hard to carry. In that context, anyone buying the shares today must be prepared to hold them for a long time -- three to five years, at minimum -- in order to let the business earn its way into the valuation.

The article Is Under Armour Inc's Valuation Over-the-Top? originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Under Armour. The Motley Fool owns shares of Under Armour. 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.

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