1. Analyst Recommendation Sell
5 Year Annual Return 29.5%
5 Year Cumulative Return 264%
Buy Price $12.36 – 19.22
UNDER ARMOUR
F303 Stock Analysis Project
Christopher Smith
F303 | IUPUI

2. Smith 2
Under Armour (UA) does not currently pay a dividend. Calculated FCFE for 2015 is
$0.46 per share, while for 2014 was $1.59 per share. The greatest differences that caused this
effect were a decrease in Working Capital (2014: $1127.8mm; 2015: $1020.0mm) and a much
higher Capital Spending per share (2014: $0.33, 2015: $0.69). The company has been able to
add to their bottom line for several of the past years, as noted later. Management has been able
to use those profits to purchase more assets, which in turn generate more profit. By not paying
out any dividends, UA has produced new lines of business that are continuously growing
globally.
The intrinsic value is $2.65 per share. With a price of $38.30 as of 10/28/2016, this price
seems very high. Further recommendation will be made after more data is analyzed from both
Under Armour and its competitors.
Under Armour’s mission is to “make all athletes better through passion, design, and the
relentless pursuit of innovation” (Under Armour, Inc.). CEO Kevin Plank opened shop in 1996
as a maker of premium quality compression t-shirts. After going public, revenues soared in the
high-performance apparel, footwear, and accessories line, making Under Armour a global
competitor.
Sources of revenue stem from retailors worldwide, but the largest amount of sales occur
at Dick’s Sporting Goods (ticker: DKS), bringing in over $3.1bb in sales during 2015. This is
bolstered with trendy advertising through sponsorships with big name players, such as Stephen
Curry, Jordan Spieth, Tom Brady, and Clayton Kershaw. These sponsorships dually enhance the
brand by maintaining relationships with younger customers.

3. Smith 3
Under Armour has a bright outlook. Revenues have a track record of increasing 20%
year-over-year, thereby leaving large room for error in expenditures. UA has pressure to spend
more for their premium materials, which lowers the bottom line. They are currently opening
stores, signing new and maintaining current endorsement deals, entering new market niches, and
launching new products, which places them as a growth company in the business cycle. A major
concern is a trailing P/E of 74.4. This can be viewed as a high price to pay for a company, but
investors seem not to mind considering that the stock has a history of trading for a high multiple.
Investors are optimistic about the leadership and direction of Under Armour and can expect years
of revenues and endorsement deals ahead. There is plenty of room to grow in footwear, direct-
to-consumer distribution, overseas expansion, and women and children lines. While the
executive staff is focused on American adult male athletes, there are a plethora of opportunities
throughout the world where their products are desired.
Under Armour’s main competitors are Nike (NKE), Adidas (ADDYY), and Lululemon
(LULU). The competitors are in the late growth and early maturity stages of the business
lifecycle, and while the industry itself is growing, they are losing market share to UA. They are,
however, more cost effective compared to UA, thereby providing lower prices on many products,
reducing prices to customers, and passing the savings on to shareholders. With much of the
competition already in footwear, direct-to-consumer distribution, overseas expansion, and
women and children lines, UA has a runway of growth to catch up and become the sole global
leader in the industry.
Capital expenditures over the previous three years have grown substantially. From 2013
through 2015 UA capex spending per share was $0.21, 0.33, and 0.69. This is an average
increase of nearly 64% each year, far exceeding the 20% revenue growth the company has

4. Smith 4
sustained over the same period. The projected capital expenditures for 2016 are $0.85 per share,
a meager 23% over last year. This can be attributed to the 50 current sponsorships and
expansion into new lines of business and geographical areas. Overseas sales are seeing difficulty
in converting cash back to USD since the dollar is very strong compared to other currencies
(Value Line). This is resulting in a decline in bottom-line for investors as it would be the
equivalent to marking down prices in the US.
Lululemon has lowered profit margins by creating return business in gyms and yoga
studios, as well as increasing sales and sponsorships to little league and local teams (Walsh).
Nike dominates the industry with a large advertising budget, endorsements of 46 of the 65
college major football teams, and the sole uniform manufacturer for the NFL. Adidas also
signed some big names in endorsement deals, such as Lionel Messi, Derrick Rose, and Damian
Lilliard (Total).
The endorsement deals are having a positive effect on both top and bottom lines, but it is
difficult to determine the direct effect since the data is not publicly published. Overseas sales are
increasing; therefore, it is necessary to invest in overseas stores and awareness. As international
partners, it is necessary to sponsor more organizations and athletes worldwide.
Using the DuPont Analysis method with 2015 data, ROE for UA is 14%; NKE is 31%;
and LULU is 26% (Yahoo! Finance). Under Armour is well below the industry average, which
means they need to either boost their bottom line or reduce their equity. From 2013 through
2015, cumulative changes in ROE are as follows: UA -1%, NKE +6%, LULU 0%. UA is
struggling to improve its bottom line, even though its revenues are increasing at roughly 20% per
year. UA has been increasing its net income and equity almost proportionately, which results in
a flat line for earnings per share. How high can the price per share go before investors decide

5. Smith 5
that they are paying too much for the same EPS year after year? This is now an interpretation of
price-to-earnings, which are as follows as of 10/28/2016: UA is trading at 77.4 times earnings;
NKE at 23.68; and LULU at 29.41 (Yahoo Finance). Simply looking at ROE would say that
there is more growth potential than Nike; however, a peek at the P/E shows how expensive the
stock really is. On the flip side, Nike has had tremendous growth in comparison, and the stock
price is trading at a much cheaper multiple. Lululemon is sitting in the middle of both. There
seem to be tremendous growth opportunities for both UA and LULU in the coming years
compared to NKE. This stock is overpriced, even though there is skepticism around the
tremendous growth potential. However, a few good deals could send any of these companies’
top and bottom lines soaring.
PEG shows the price of a stock in relation to its earnings growth. UA is valued at a PEG
of 252.20, while NKE is 401.36 and LULU is 216.25. Looking to forward earnings, this would
imply that LULU is the cheapest by this measure and NKE is the most expensive. UA falls in
the middle for the industry.
VRE shows a picture opposite in this case. The return on equity for the price should be
relatively high. The VRE for Nike is nearly 7 times and Lululemon approximately 6.7 times that
of Under Armour. This makes both competitors much more attractive in terms of future return
rates. UA would need to either boost its ROE or investors would need to pay a much smaller
multiple of earnings for the stock. On the other hand, NKE and LULU are cheap and have a
much larger upside potential in the short-term. This supports an argument that Under Armour is
overpriced.

6. Smith 6
After analyzing Under Armour as a company, analyst recommendations is sell.
The high price cannot be compensated with a speculative high growth potential. A control of the
high-end and performance segments of athleisure wear will eventually control more cash flow
than the low-end segment, as the old premium becomes the new norm. Under Armour has the
products to accomplish this, but the costs of materials are weighing heavily on their bottom line.
Until management can reduce costs while maintaining the growth in revenues, this stock is
overvalued, even though it is overweight. Value Line sees target estimates of 45 – 70 for the
years 2019 through 2021, which is a simple cumulative return of just 7.7% to 77.5%. While
there is exceptional upside potential, there are also other options that give similar returns at a less
expensive price.

7. Smith 7
Works Cited
“LULU Key statistics | lululemon athletica inc. Stock - Yahoo finance.” Yahoo! Finance. 01
Dec. 2016. Web. 1 Dec. 2016. <http://finance.yahoo.com/quote/LULU/key-
statistics?p=LULU>.
“NKE key statistics | Nike, Inc. Common stock stock - Yahoo finance.” Yahoo! Finance. 01 Dec.
2016. Web. 1 Dec. 2016. <http://finance.yahoo.com/quote/NKE/key-statistics?p=NKE>.
Totalsportek2. "Biggest Athlete Endorsement Deals In Sports History." TOTAL SPORTEK.
2016. Web. 01 Dec. 2016. <http://www.totalsportek.com/money/biggest-endorsement-
deals-sports-history>.
“UA Income Statement.” NASDAQ.com. Web. 01 Dec. 2016.
<http://www.nasdaq.com/symbol/ua/financials?query=income-statement>.
“Under Armour, Inc. – About Under Armour.” Under Armour, Inc. – About Under Armour.
Web. 01 Dec. 2016. <http://www.uabiz.com/company/about.cfm>.
Value Line. "Value Line - The Most Trusted Name in Investment Research." Value Line - The
Most Trusted Name in Investment Research. Web. 01 Dec. 2016.
<https://research.valueline.com/secure/research#list=recent&sec=company&sym=ua>.
Walsh, Tamara. "3 Surprising Ways Lululemon Athletica Is Driving Sales Growth Today." The
Motley Fool. 2014. Web. 01 Dec. 2016.
<http://www.fool.com/investing/general/2014/08/28/3-surprising-ways-lululemon-
athletica-is-driving-s.aspx>.