Under Armour Stock: High FCF Yield, Attractive Valuation (NYSE:UA)

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Investment Thesis

  • According to the HQC Scorecard, Under Armour (NYSE:UA, NYSE:UAA) is rated as very attractive in the categories of Valuation (92 out of 100 points) and Expected Return (100 out of 100).
  • In the category of Financial Strength (72 out of 100 points), the company is rated as attractive.
  • For Profitability (50 out of 100) and Growth (40 out of 100), Under Armour is rated as moderately attractive.
  • In the category of Economic Moat, the company is rated as unattractive (29 out of 100). This low category score is based particularly on Under Armour’s competitive disadvantages in comparison to its competitors NIKE (NYSE:NKE) and adidas (OTCQX:ADDYY).
  • I rate Under Armour as a buy. The company currently has a very appealing valuation and a very attractive expected rate of return according to my DCF Model. Under Armour is currently undervalued according to the same model.
  • However, from my point of view, the risk of investing in Under Armour is much higher than investing in its competitors Nike or Adidas. For this reason, I would recommend to underweight the Under Armour position in an investment portfolio.

Under Armour’s Business Model

Under Armour was founded in 1996 by Kevin Plank, at the time a 24-year-old former captain of the University of Maryland football team. Under Armour’s principal business activities are the development, marketing and distribution of branded performance apparel, footwear and accessories.

In 2021, Under Armour generated a revenue of $5,683.5 million. The company’s main product category is Apparel (68% of its revenue), followed by Footwear (22%), Accessories (8%) and Licensing (2%). North America is Under Armour’s largest market, with 67% of revenue generated in the region. 57% of the company’s products are sold via wholesale and 41% via Direct-to-Consumer.

Under Armour's Business Model

Source: Under Armour Annual Report 2021

Under Armour’s Competitive Advantages and Disadvantages

The barriers to enter into the sporting goods manufacturing industry are relatively high. This is based on the fact that a relatively high amount of human as well as financial capital is required in order to be able to develop, manufacture, market and finally distribute sporting goods. Additionally, financial capital and a long time-horizon is needed in order to be able to establish a strong brand image, which is necessary to be able to market apparel and footwear on a broader and global level.

However, Under Armour found its niche in the sporting goods industry by focusing primarily on American Football. Furthermore, when Under Armour started its business back in 1996, the company focused on making clothes with the aim of improving the performance of athletes. Still today, Under Armour focuses on serving the market niche of performance apparel.

In order to strengthen the company’s brand image, Under Armour has agreed endorsement contracts with athletes from various sports. The most significant being with basketball player Stephen Curry in 2013 and American Football quarterback Tom Brady, who signed in 2010. Additionally, Under Amour has agreed a large amount of endorsements with US college teams and universities in order to further strengthen its brand image.

Although Under Armour has been able to find its niche in the sporting goods manufacturing industry, its competitors Nike and Adidas are still far in front of Under Armour in terms of brand value and brand recognition. Proof of this is the fact that Under Armour is not even listed in the ranking of the 500 most valuable brands in the world according to Brand Finance, while Nike is listed at position 49 (with an estimated brand value of $33,176 million) and Adidas at 130.

Compared to its main opponents Nike and Adidas, Under Armour has additional competitive disadvantages: Nike in particular has much stronger financial capabilities to invest in the marketing of its products as well as in technology and innovation. Furthermore, Nike’s stronger financial capabilities enable the company to contract the best and most high potential athletes in order to promote their brand and products. Proof of Nike’s stronger financial capabilities is the fact that the company generated EBIT’s of $7,231 million in 2021 while Under Armour generated EBIT’s of only $524 million in the same year. The fact that Nike operates with an EBIT Margin (TTM) of 15.4% while Under Armour operates with one of just 7.36%, is a further indicator of Under Armour’s competitive disadvantage compared to industry leader Nike.

These factors show that an investment in Under Armour comes with relatively high risk, particularly due to strong competition from the likes of Nike and Adidas.

Under Armour’s Valuation

Discounted Cash Flow (DCF)-Model

In terms of valuation, I have used the DCF Model to determine the intrinsic value of Under Armour. The method calculates a fair value of $17.77 for the company. At the current stock price, this results in an upside of 94.3%.

According to Seeking Alpha, Under Armour’s Average Revenue Growth Rate (FWD) of the last 5 years is 4.07%. However, I will make more conservative assumptions. Therefore, I assume a Revenue Growth Rate and EBIT Growth Rate of 3% for Under Armour over the next 5 years. The GDP Growth Rate of the United States is about 3% per year on average. Therefore, I also assume a Perpetual Growth Rate of 3%.

I have used Under Armour’s current discount rate (WACC) of 8.75%. Furthermore, I calculate with an EV/EBITDA Multiple of 8.0x, which is the company’s latest twelve months EV/EBITDA.

My calculations are based on the following assumptions as presented below (in $ millions except per share items):

Company Ticker

UAA

Revenue Growth Rate for the next 5 years

3%

EBIT Growth Rate for the next 5 Years

3%

Tax Rate

8.2%

Discount Rate (WACC)

8.75%

Perpetual Growth Rate

3%

EV/EBITDA Multiple

8.0x

Transaction Date

24.06.2022

Fiscal Year End

31.12.2022

Current Price / Share

$9.15

Shares Outstanding

461.6

Debt

$1,476.1

Cash

$1,009.1

Capex

$101.2

Source: The Author

Based on the above assumptions, I calculated the following results (in $ millions except per share items):

DCF Model Under Armour

Source: The Author

Appendix 1 Under Armour

Source: The Author

Appendix 2: The Author

Source: The Author

Terminal Value

Perpetual Growth

$12,221

EV/EBITDA

$6,157

Average

$9,189

Source: The Author

Market Value

Market Cap

$4,224

Plus: Debt

$1,476

Less: Cash

$1,009

= Enterprise Value

$4,691

Equity Value/Share

$9.15

Source: The Author

Intrinsic Value

Enterprise Value

$8,671

Plus: Cash

$1,009

Less: Debt

$1,476

= Equity Value

$8,204

Equity Value/Share

$17.77

Source: The Author

Market Value vs. Intrinsic Value

Market Value

$9.15

Upside

94.3%

Intrinsic Value

$17.77

Source: The Author

Relative Valuation Models

Under Armour’s P/E (FWD) Ratio

Under Armour’s P/E Ratio is currently 10.46, which is 7.70% below the sector median (11.33). This provides an additional indicator that Under Armour is currently undervalued.

Under Armour’s Free Cash Flow Yield

Under Armour’s latest twelve months free cash flow yield is 9.9%, while the company’s free cash flow yield for the fiscal years ending December 2017 to 2021 averaged 3.2%. The latest twelve months free cash flow yield of Nike is 3.2% and for Adidas it is 6.9%. These are additional indicators for Under Armour’s currently attractive valuation.

Under Armour’s Dividend

In fiscal year 2020 and 2021, Under Armour did not pay any dividends. The company currently anticipates that it will retain future earnings for their own business usage and does not anticipate paying dividends in the foreseeable future.

The following will show how much the dividend and dividend yield would be if Under Armour were to pay a dividend. The dividend and dividend yield is based on the next fiscal year EPS estimate multiplied by a range of hypothetical payout ratios:

EPS (FWD)

Payout Ratio

Annual Dividend

Dividend Yield

0.64

10%

0.06

0.70%

0.64

20%

0.13

1.40%

0.64

30%

0.19

2.11%

0.64

40%

0.26

2.81%

0.64

50%

0.32

3.51%

0.64

60%

0.39

4.21%

Source: Seeking Alpha

This overview is a further indicator of Under Armour’s currently attractive valuation. If we were to assume that Under Armour would have a Payout Ratio of about 30% (such as its competitor Nike), it would pay a dividend yield of 2.11% (based on the next fiscal year EPS estimate). This dividend yield would be significantly higher than the one of its competitor Nike (which has a dividend yield (FWD) of 1.14%).

The High-Quality Company (HQC) Scorecard

“The aim of the HQC Scorecard I have developed is to help investors identify companies which are attractive long-term investments in terms of risk and reward.” Here you can find a detailed description about how the HQC Scorecard works.

Overview of the Items on the HQC Scorecard

“In the graphic below you can find the individual items and weighting for each category of the HQC Scorecard. A score between 0 and 5 is given (with 0 being the lowest rating and 5 the highest) for each item on the Scorecard. Furthermore, you can see the conditions that must be met for each point of every item that is rated.”

HQC Scorecard

Source: The Author

Under Armour According to the HQC Scorecard

Under Armour According to the HQC Scorecard

Source: The Author

According to the HQC Scorecard I have developed, the overall score of Under Armour is 56 out of 100 points. This means that Under Armour can currently be classified as a moderately attractive long-term investment in terms of risk and reward.

The HQC Scorecard indicates that Under Armour is rated as very attractive in the categories of Valuation (92 out of 100 points) and Expected Return (100 out of 100) (calculated as the Expected Annual Internal Rate of Return (IRR) with my DCF Model). Furthermore, the company is rated as attractive in the Financial Strength category (72 out of 100 points).

In the categories of Profitability (50 out of 100 points) and Growth (40 out of 100) Under Armour is only rated as moderately attractive. In terms of Economic Moat (29 out of 100 points), it is rated as unattractive. This low Economic Moat rating is mainly due to the strong and intense competition within the sporting goods industry and Under Armour’s competitive disadvantages compared to industry leaders Nike and Adidas.

The HQC Scorecard rating strengthens my belief that Under Armour can be considered as an appealing investment, this is especially due to its very attractive valuation and expected rate of return (according to my DCF Model). However, the company’s lower economic moat and brand value in comparison to its competitors Nike and Adidas, brought me to the conclusion that I would not overweight the Under Armour stock in an investment portfolio.

Under Armour According to Seeking Alpha’s Factor Grades

According to Seeking Alpha‘s Factor Grades, Under Armour is rated with a C+ in terms of Valuation. For Growth the company gets an A+ rating and scores a B- for Profitability. In the graphic below you will find the overview of the Seeking Alpha Factor Grades for Under Armour:

Under Armour According to the Seeking Alpha Factor Grades

Source: Seeking Alpha

Risks

One of the main risk factors I see for Under Armour is the fact that the market for apparel and footwear is extremely competitive. Under Armour competes with Nike and Adidas, who have both established strong brand images. From my point of view, the existence of two strong competitors such as Nike and Adidas is the biggest risk factor for Under Armour. This intense competition could result in a loss of Under Armour’s market share and furthermore could result in a decrease of the company’s revenue and profit margin. Additionally, Under Armour competes with companies such as PUMA (OTCPK:PMMAF) and Lululemon Athletica (NASDAQ:LULU) as well as with smaller and regional companies who may have local brands with stronger recognition regionally than Under Armour.

Another risk factor I currently see is that Under Armour could be affected negatively by periods of inflation. The fact that Under Armour has still not been able to create such a strong brand image compared to its competitors Nike and Adidas, I see the company being less able to pass higher prices to its customers than its rivals. As a result of inflation, the profit margin of Under Armour could be affected negatively as well.

An additional risk factor I see for Under Armour is if the company was unable to anticipate consumer preferences or to successfully develop new and innovative products. Many of Under Armour’s products are subject to rapidly changing consumer preferences that the company may not always be able to anticipate. Being unable to anticipate these changing consumer preferences could also have negative effects on the company’s profit margins.

Another risk factor I see for Under Armour would be if the brand was damaged by negative publicity. Due to the fact that Under Armour doesn’t have such a strong brand image as Nike and Adidas, negative publicity could have immense effects on the company’s brand image. This could additionally result in declining revenues and lower profit margins.

Under Armour’s strong and intense competition, especially with Nike and Adidas, are strong indicators that the risk of investing in the company is relatively high. This is also proven by the rating of the HTC Scorecard, in which Under Armor only received a moderately attractive rating in terms of risk and reward.

The Bottom Line

My Discounted Cash Flow Model indicates that Under Armour is currently undervalued with an upside of 94.3%. The DCF Model calculates a fair value of $17.77 for the company.

According to the HQC Scorecard, Under Armour scores 56 out of 100 points. The HQC Scorecard demonstrates that Under Armour can be classified as moderately attractive in terms of risk and reward. The HQC Scorecard also expresses Under Armour’s currently very attractive valuation as well as its very attractive expected rate of return as according to my DCF Model. However, it also shows that the company can be considered as unattractive in the category of Economic Moat. In the categories of Profitability and Growth, it is rated as moderately attractive according to the HQC Scorecard.

I rate Under Armour as a buy. The current valuation of the company is very attractive and it also has a very attractive expected rate of return. Additionally, Under Armour’s current free cash flow yield is appealing. However, due to the company’s competitive disadvantages in comparison to its main competitors Nike and Adidas and the relatively high risk factors when investing in Under Armour, I would underweight the Under Armour stock in an investment portfolio.

Thank you for reading and I would appreciate any feedback on this analysis about Under Armour!

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