STOCK WATCH


Under Armour: A Long-Shot Wager

Bob Frick

The sales and earnings growth prospects for this maker of athletic apparel make its stock a good gamble.



Watching the shares of Under Armour stock the past year has been as exciting -- maybe more so -- than watching any team that wears the company's athletic apparel. Last June, when the stock traded at about $46, I wrote that "As rugged as its gear is, though, Under Armour's stock seems as delicate as a hot-house flower." The stock was so dear, I wrote, that "any news, good or bad, will easily fan the fires of greed or fear."

Sure enough, Under Armour has been as high as $72.40 and as low as $25.39 since then. But if you're the kind of investor who doesn't mind wagering on long shots, now could be a good time to lay a bet on Under Armour's shares (symbol UA).

Under Armour has captivated investors for good reason. The company, which started in Maryland in 1996, had sales of just $20 million six years ago. Analysts predict that sales will reach almost $770 million in 2008.

Under Armour's cachet rests on the tough, moisture-wicking fabric that it uses in sports apparel. But the company has also flexed its muscles in other lines, including outdoor clothing and athletic shoe lines, and has successfully exported its brand to Europe.

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While sales have been growing fairly consistently, profits have fluctuated. The company made $20 million in 2007's third quarter and $3 million in 2008's first quarter. And an alarming rise in inventory levels last year helped drive down the share price. Even so, at its June 2 close of $34.75, the stock sells at a pricey 29 times the $1.19 per share that analysts, on average, expect Under Armour to earn in 2008.

So why take a chance on Under Armour now? Analyst Omar Saad, of Credit Suisse Securities, says that while inventory levels remain a concern, the company makes a solid case that current sales and future orders are strong. Saad adds that the Under Armour magic of breaking into new markets continues with the "extremely successful" launch May 3 of a cross training shoe, the Performance Trainer. Under Armour now dominates the market for that type of shoe, with a 70% share, according to Saad.

The market for cross-training shoes is not huge, but then Under Armour isn't a huge company. Next year, though, Under Armour plans to attack the much larger (11 times bigger) running-shoe market. Success there would go a long way toward helping the company achieve its goal of generating 25% annual sales and earnings growth over the next three years, with growth coming mainly from footwear, women's apparel, international sales and direct-to-consumer sales.

The company also said recently that it will tie executive compensation to inventory levels, which helped assure analysts that it's serious about getting that problem under control.

The biggest cloud hanging over Under Amour -- the weak economy and soft consumer spending -- isn't of its own making. Dick's Sporting Goods recently cut back its profit estimates for this year, showing that "sporting goods is not immune to consumer headwinds," says Thomas Weisel Partners analyst Jim Duffy.

At its current level, Under Armour isn't ridiculously overvalued, as it was when it traded at twice the price last August. The stock has fallen into the good-gamble-but-far-from-a-sure-thing range.




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