Under Armour Over the Top
biz.yahoo.com
Friday November 18, 3:40 pm ET; By W.D. Crotty
If Thursday's post-IPO trading in solar cell company SunPower (Nasdaq: SPWR - News) didn't amaze you, then the trading in Under Armour (Nasdaq: UARM - News) certainly should.
This company with the funny name is not in the underarm deodorant business, nor is it providing armor for the vehicles in Iraq, but maybe it can expand into one of those areas with all of the cash it raked in from its initial public offering. No, these folks are in the athletic apparel business. But they did start off with a T-shirt that would supposedly "wick perspiration off your skin." The rest is microfiber history.
Don't snicker. This company has grown sales from $5 million in 2000 to $263.4 million for the 12 months ended Sept. 30, 2005. That's a 121% compounded annual growth rate (CAGR). Operating income has followed suit, compounding at 121% over the comparable period.
The marketing strategy starts with its products to professional sports leagues, major collegiate teams, and Olympic athletes. High-profile athletic use strengthens the brand authenticity and, therefore, consumer demand. The Army and Air Force Exchange services, Dick's Sporting Goods (NYSE: DKS - News), and The Sports Authority (NYSE: TSA - News) are the top customers, accounting for 36% of sales.
Ah, but what about the IPO?
Originally priced at a maximum of $9.50 a share in early November, the price was subsequently raised to a maximum of $12 just before the IPO. To the company's credit, the offering sold for $13 a share.
The opening trade went to $31 -- a whopping 138.5% move. And the stock kept rising, to $40 -- that is up an amazing 207.7% -- before gravity took hold and sent the stock back down toward the mid-$20 range.
So, what are investors buying?
The company will have 46.4 million shares outstanding. Earnings for the first nine months equaled $0.29 per fully diluted share. Working under the assumption that third- and fourth-quarter earnings generate approximately 65% of sales, as has been the case for the past two years, and margins hold at around a historically reasonable 7%, we'll get something like $0.47 a stub. That prices the company at about 28 times its initial offering price and 56 times its current price.
Now let's compare Under Armour with its competitors. Nike (NYSE: NKE - News) and Reebok (NYSE: RBK - News) trade for 17.2 and 14.7 times trailing earnings and have posted five-year trailing CAGR to net income figures of 59.9% and 77.1%, respectively, while Under Armour has managed 104%. That extra growth, especially from such a small base, is hardly worth today's earnings multiple.
Oh, and don't overlook 4.1 million stock options priced at $2.87 a share and another 3 million approved for issuance. As attractive as Under Armour the company is, investors should realize there are plenty of examples this year of hot IPOs that fizzled in a matter of weeks.
And for those intrigued by the growth the company has shown and the prospect of future growth along these lines, there is one other reason to worry about this stock's price. Unlike Thursday's bottle-rocket performance from SunPower, there is no patent base for the fabric that is the cornerstone of this company's success. Deep pockets at Nike or Adidas (which is buying Reebok), or anyone else manufacturing athletic gear, could turn their attention in this company's direction. At current trading levels, Under Armour is a high-risk stock. |
