Value: Under Armour Price Volatility: Don’t Sweat it

Under Armour Price Volatility: Don’t Sweat it

By GreenArrowInvestments.com | January 16, 2007

In the face of the recession that Wall Street wants us to believe is inevitable, retail is getting whacked. Under Armour (NYSE: UA) got hit with a 10% drop on Tuesday as the Commerce Department reported weaker than expected consumer spending. Retailers saw a 2% drop in December sales, especially sporting goods.

Our gut feeling is that Under Armour has enough momentum to keep sales strong even with the downward pressure from some consumers. The big drop came after Goldman Sachs analyst Brad Cragin downgraded the sector, specifically mentioning Nike (NYSE: NKE) and Foot Locker Inc. (NYSE: FL), but also listing many others including Under Armour. No doubt Cragin, is feeling heat from his firm and investors about upgrading Nike just three weeks ago:
"Nike's industry leadership was clear," said Goldman Sachs analyst Brad Cragin on December 20, 2007, who raised his profit estimates on Nike for the next three years. "Nike continues to gain market share despite a challenging environment."

It must be embarrassing to see the stock drop virtually every day for over three weeks following the upgrade. True, the retail picture has changed somewhat since the Commerce Department numbers came in, but nonetheless this inconsistency makes us skeptical of Goldman’s analysis.

To further rebut the downgrade, Under Armour won two upgrades: On Monday Citigroup upgraded Under Armour to Buy citing:
“Inventories were up 102% in Q3 due to the company's anticipated demand for holiday and cold weather. While much of UA's product can be sold full price in future seasons because there is not a high degree of fashion, there is downside risk if UA doesn't report a cleaner inventory position when it announces Q4 results January 31st. However, based on our store checks we are less concerned about Under Armour's inventory position than we were last quarter. Our store checks suggest that holiday sell-throughs were solid, with a lot of UA full-price product selling at DKS, especially in the week before Christmas."...“Since there is some risk in Q4, investors could still capture upside after the co reports. UA is a great LT idea for 3 reasons: 1) the brand sells to a higher end consumer making it somewhat defensive in a weaker US economy, 2) there is significant growth potential from new categories and geographies, and 3) UA is a strong brand. Based on this, our estimates could be conservative as they are below historical growth rates and consensus.”

And on Tuesday UBS announced that it is raising Under Armour to a Buy rating.

We will not attempt to speculate on how Under Armour’s numbers will look in two weeks, come January 31, 2008. However, considering UA's relatively small market cap of 2 billion, we feel the risk of short term contraction in retail spending to be outweighed by its long term growth prospects which are further solidified by strong brand recognition. Short term catalysts like its new footwear lineup and Super Bowl 60-second commercial will be instrumental in building its brand.

Lastly, we have included an unconventional graph that illustrates historical prices in relation to a quarterly assets/liabilities/total equity/etc ratio. In every instance the market value gets back to equilibrium and the market adjusts to historical values.

While past performance does not guarantee future results, the pattern in this chart implies that even if revenues are slashed in the next 10-K, the market value will still adjust upward.

DISCLOSURE: The Author of this article has a long position in Under Armour at the time of writing. This is an opinion and not a recommendation to buy or sell the stock.

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