Under Armour Stock Downgraded: How Much Worse Can It Get?

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Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope.

Under Armour (NYSE: UAA) (NYSE: UA) stock has shed more than half its value since the start of the year -- and if you ask Wall Street, the worst is yet to come.

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When Under Armour reported earnings yesterday (sales down 5% year over year, and profits down nearly 60%), Wall Street's reaction was fast and furious. In rapid succession, Bank of America, J.P. Morgan, and DA Davidson all rushed to downgrade the stock, while Barclays, Piper Jaffray, and FBR cut price targets. Now, a new day is dawning, but the weather looks just as stormy for Under Armour shareholders.

This morning, SunTrust Robinson Humphrey announced that it, too, is cutting its rating on Under Armour stock (to neutral). Canaccord Genuity has become the most negative stock picker of all, assigning a "sell" rating to the sportswear stock, alongside the lowest price target yet seen.

Here are three things you need to know.

1. What Under Armour said

Let's start with what Under Armour told us yesterday. For the first time ever, the formerly fast-growing seller of athletic clothing and footwear reported a year-over-year sales decline, with sales falling 5% from Q3 2016 levels to just $1.41 billion. The company's pro forma profit of $0.22 per share actually exceeded Wall Street estimates. However, net income for the quarter was only $0.12 per share and declined 59% year over year.

Looking forward, Under Armour predicts that it will end up earning between $0.18 and $0.20 per share by year-end -- but only "pro forma." On a GAAP basis, with gross profit margins plummeting, and Under Armour still spending about $1.9 billion annually on operating costs, it warned that it will record operating profits of no more than $10 million this year -- and perhaps no operating profit at all.

Translation: By the time we reach the bottom line on 2017, Under Armour will almost certainly report a net loss.

2. What Wall Street had to say about that

Suffice it to say that Wall Street was not amused. Here's just a sampling of what Under Armour's former fans are saying about the company today (with thanks to StreetInsider for the commentary):

  • Under Armour shares are "still expensive." (Bernstein)
  • The stock is "bleeding out." (Piper Jaffray)
  • The company can expect "an elongated recovery time." (DA Davidson)
  • "Upside catalysts" are "unlikely before H2 2018." (SunTrust)
  • 2017 and 2018 profits will be "both down 47% vs. our previous expectations." (Bernstein)
  • Under Armour's "business model" of selling overpriced sportswear is "under fire." (J.P. Morgan)
  • It suffers from "weak athleticwear trends, slower footwear growth, no new significant innovation." (FBR)

And now the coup de grace, coming from Canaccord Genuity this morning: "Soft sales" plus high expenses "will squeeze profits in 2018." Under Armour is a "sell," and its stock price will fall another 35% to $8 within a year.

3. Under Armour, still overpriced

It's no secret that I'm no fan of Under Armour stock -- and have not been for quite some time. Although it remains an official recommendation here at The Motley Fool, I was calling it "overpriced" way back in January 2011 -- at half what it costs today -- and pretty close to what Canaccord Genuity says Under Armour stock is worth today.

Granted, that was back when the company was selling barely $1.1 billion in merchandise. At $4.9 billion in trailing sales, Under Armour is more than four times bigger today. A bull might argue, then, that a bigger Under Armour should be worth much more today. Then again, at least back in 2011, it was GAAP-profitable and generating at least a trickle ($20 million) of free cash flow.

Today, by its own admission, Under Armour is running full tilt toward booking a full-year loss. Its free cash flow has been negative for two years in a row (according to data from S&P Global Market Intelligence), was negative in both of the first two quarters of this year -- oh, and the company declined to provide any information on its current free cash flow in yesterday's earnings report.

Long story short, count me with Canaccord Genuity on this one: At $5 billion in market capitalization, with no dividend to support its stock and a P/E that could turn negative any day now, Under Armour stock is a sell.

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Rich Smith has no position in any of the stocks mentioned. Despite his reservations, The Motley Fool still owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool has a disclosure policy.