After a horrendous three-year stretch for Under Armour, Inc. (NYSE: UA, UAA) investors, the stock seems to be back on track. Under Armour’s efforts to improve efficiency and profitability may have the company well-positioned for the long-term, but some analysts say the stock is still too expensive.
After speaking with Under Armour management, Stifel analyst Jim Duffy says he is now bullish on UAA stock. According to Duffy, Under Armour is shifting its focus from growth to profitability and is now on the path for $1 in earnings per share by 2021. Duffy says the company’s latest 10-K filing suggests management isn’t just talking the talk but is actually taking actions to streamline the business.
[Read: UA vs. UAA: What’s the Difference Between Under Armour’s 2 Stock Classes?]
“Review of the 10-K showed a [year-over-year] reduction in sponsorship commitments,” says Duffy, who is particularly bullish about Under Armour’s ability to boost its margins by managing its inventory, expenses and sourcing better.
“With the recent market evidence that performance athletic demand and channel inventories are healthy, we have increased confidence that inventories will be appropriately matched to demand before year-end,” so that margin improvement can continue in 2019 and beyond, he says.
Duffy says Lululemon Athletica ( LULU) is the perfect blueprint for Under Armour. Bank of America estimates Lululemon has boosted its gross margins by at least 5 percent from 2015 to 2018.
Duffy is forecasting compound annual revenue growth of 8 percent for Under Armour from 2018 to 2021, well short of the 25 percent-plus growth the company has reported in years past. However, he is also expecting solid operating margins of 9.7 percent.
Despite the optimistic long-term outlook, Bank of America analyst Robert Ohmes says Under Armour stock’s valuation is stretched after a 51.7 percent year-to-date gain. He says inventory levels are still too high, which will continue to pressure pricing in coming quarters.
UAA is trading at 68 times fiscal 2019 EPS estimates, a similar multiple to when the company was growing revenue 25 percent or more (compared to 2017 revenue of more than 3 percent), Ohmes says.
[See: Finish First With Athletic Apparel Stocks.]
Stifel has a “buy” rating and $27 price target for Under Armour. Bank of America has an “underperform” rating and $10 target for UAA stock.
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Analysts Divided on Under Armour Outlook originally appeared on usnews.com
