Under Armour (NYSE:UA) cannot hide from a recession
Today's Financial News - Posted November 13, 2008
I am a big fan of Under Amour’s (NYSE:UA) products. Their stock is another story. We made big gains by shorting them last month. It may be high time to do it again.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is tough for many investors to admit, but marketers rule Wall Street. On most days, it is not true fundamentals that rule the Dow. It is the change in the way we perceive a company’s valuation that makes a stock go up or do.
If marketers do their job, share price rises. If they fail, shareholders feel the pain.
Investors rarely weigh a company’s marketing talent in their decision-making process. It is a flaw that could cost them dearly. In many cases, a firm’s marketing team has more to do with moves in its valuation than do changes on its income statement.
A perfect example is Under Armour (NYSE:UA). The company has one of the best marketing strategies in all of business, but even the most talented salesman cannot sell something to a person with no money.
Blinded by the facts
Look around Wall Street. Best Buy (NYSE:BBY) told us yesterday it has witnessed a “seismic” shift in consumer spending. Macy’s (NYSE:M) posted a horrid third-quarter earnings report. And Linens ‘n Things is headed to the history books.
On the other hand, Goodwill Industries reports sales are up by 7%. Ultra-discount stores like 99 Cents Only (NYSE:NDN) and Family Dollar (NYSE:FDO) are seeing their share price soar. Wal-Mart (NYSE:WMT) is the only major retailer with even a semblance of good news.
The only places Americans are spending their money is at the cheapest store they can find.
So what in the world continues to make investors believe Under Armour and its expensive discretionary clothing lineup will maintain historic sales levels?
Let’s face it. The American economy is in a deep recession. The folks that were buying Under Armour’s over-priced and trendy gear are now the ones that have lost their jobs and cannot afford their homes.
The last time I recommended betting against the company, we raked in gains of over 70% in just five days. With share price above $21 today, it is time to do it again.
Here are some facts to prove my point:
- U.S. retailers recorded their worst October ever, with overall same-store sales dropping by 0.9%.
- Consumer confidence is at its lowest levels ever.
- Under Armour continues to operate with negative cash flow.
- Maverick Capital, which owned over 7% of Under Armour, just unloaded its entire position.
- The number of shares short has grown to 36.5%.
With figures like those, it is hard to believe investors are willing to maintain the company’s price-to-earnings ratio of 23. It is foolish to think the company will maintain a sales pace anywhere close to levels it has enjoyed lately.
Even the company’s executives know a rough road is ahead. They just lowered their operating income estimates to a range of $97.5 million to $104.5 million. They previously announced expectations of $104.5 million to $105.5 million.
With consumers basically locking their wallets and throwing away the key, even the new estimates are far too high. With consumer spending at the retail level dropping by nearly one percent, investors should not believe Under Armour will grow its sales by 24%.
Under Armour’s brand is one of the strongest in the industry, but a brand can only take you so far. Once a company matures and enters its slow-growth phase, fundamentals take over and investors take a dramatic hit.
Under Armour’s overly loyal investors have had a tough time realizing this time-tested fact. They will suffer as share price drops towards $15 after the next earnings release.
Unless you take a short position, steer clear of this falling star.
Next Article: Income investing: Dividend opportunities during a recession
2 Responses to “Under Armour (NYSE:UA) cannot hide from a recession”
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November 14th, 2008 at 6:23 pm
Hi,
GE's dividend yield:Either my math or yours is off.At$1.24 p/year I believ the yield comes to 7.60% not “over 10%” as stated in your article about GE today.PLease help mer out.Thanks
Cye Strowman
swatchit1928 [at] yahoo [dot] com
November 17th, 2008 at 9:14 am
Cye,
You are very right and your correction serves as a good reminder that a calculator is only as good as the guy punching the numbers. GE is still a heck of a good buy.