For the first time in a long while, Under Armour Inc (NYSE:UAA) stock is popping after a quarterly earnings report.
It wasn’t a clean beat-and-raise quarter. Nor were the numbers even that good. But revenue healthily topped expectations, and actually grew in the quarter (the consensus estimate called for flat revenues). North America revenue declines moderated. International revenue growth picked back up. Gross margins came in well ahead of expectations.
As a result, the much maligned UAA stock is up about 15% as of this writing.
But I think this is a sucker’s rally. UAA stock is still insanely expensive, and growth is still insanely low. Things are getting better, but they aren’t good enough to buy the stock just yet.
Here’s a deeper look.
Why Under Armour Stock Is Overvalued
The big thing about Under Armour is that its North American business is actually experiencing declines at a surprisingly early stage.
North America revenues topped out at $4 billion last year. They fell 5% this year to $3.8 billion, and are expected to fall roughly another 5% next year. By comparison, Nike Inc (NYSE:NKE) reported North American revenue growth of 3% last year on a total revenue base of over $15 billion.
When put in perspective, then, Under Armour’s declining North America revenues at a total base of less than $4 billion is quite unimpressive.
Bulls want to get excited about the fact that North America revenue declines moderated from down 12% last quarter to down 4% this quarter. But at $4 billion in annual revenues, there shouldn’t be any decline. Plus, the guide calls for a mid single-digit decline next year, too. At the end of the day, UAA is just struggling to compete with Nike and Adidas AG (ADR) (OTCMKTS:ADDYY) in the all important North American market.
Bulls also want to point to the international growth narrative, which did pick up steam this quarter. Growth jumped from 34% last quarter to 43% this quarter. But they were up 60% a year ago, and are expected to be up only 25% next year. Clearly, this is a slowing international growth narrative, and that makes sense. If the North American business tapped out at $4 billion (about a fourth the size of Nike), then the international business should also tap out at an early stage.
Gross margins are starting to improve. That is a good sign. Earnings are also trending in the right direction. That is another good sign. But if you back out and look at the whole picture, gross margins have come down quite a bit, so this is just a marginal rebound. And earnings have also come down quite a bit so, again, this is just a marginal rebound.
These marginal rebounds do make for good investments if the numbers add up. But when it comes to UAA stock, the numbers don’t add up. This is a mid-single-digit revenue growth story with some good (but not great) margin drivers. At best, this company can grow earnings around 20% per year over the next five years.
Even at that aggressive estimate, UAA stock’s 87-times forward multiple makes no sense. That gives UAA stock a price-to-earnings/growth (PEG) ratio of over 4. The S&P 500 has a PEG ratio of just 1.2.
Bottom Line on UAA Stock
In the bigger picture, today’s big pop in Under Armour just puts the stock back to where it was before the last earnings report.
I don’t think this is a sustainable rally, given the stretched valuation and still muted growth prospects. I fully expect UAA stock to continue to struggle into the foreseeable future.
As of this writing, Luke Lango was long NKE.
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