WAN CHAI, HONG KONG, HONG KONG ISLAND – 2018/04/07: Pedestrians walks past American clothing brand … [+]
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Under Armour stock (NYSE: UA) lost nearly 65% this year, declining from $19 to just under $7. However, it then increased by roughly 25% to around $8.60 (as of July 10, 2020). This means that the stock stands more than 55% below where it stood at the beginning of this year. Why such pessimism? Two reasons. One – With the spread of the pandemic, Under Armour’s stores were shut so there were no avenues for consumers to buy its products. Two – the worsening economy means the loss of jobs and consumers focusing on saving instead of spending, especially when it comes to discretionary products such as apparel, footwear, and accessories. While apparel and footwear can be considered essentials, their durability means that consumers can wait for sufficiently long periods of time before buying new. But this is not all. There is more to this story. Trefis price for Under Armour is $10.40, about 20% above the market price of $8.50 (as of July 10, 2020). Here is why.
These Can Trigger Under Armour’s Stock Movement
First we need to look at Under Armour’s revenues. We forecast 2020 revenue to decline by at least 15% to $4.5 billion. While worrisome, it is not the end of the world. The stock is already down 50% year-to-date (as of July 10), which means that a sharp decline has already been taken into account. What’s not taken into account is how Under Armour can bounce back once the stores open. We think that revenue can grow to $4.9 billion in 2021. While still below the 2020 level, we consider it significant with the view of the possible pull back in discretionary spending in coming quarters. The company started opening its stores in mid-May, which is earlier than what many would have expected when the Pandemic started peaking in the U.S.
The second positive is that Under Armour has spent the last 2 years transforming its business to make it leaner and more cost efficient. This is expected to boost margins which means that the market could value each dollar of Under Armour’s sales higher. In addition, Under Armour has scaled back discounted products which is partly the reason behind its sluggish sales growth recently (not counting Covid-19 impact). But the goal of transforming to a full priced product company is something that needs to be considered, and will have an accretive effect on EPS.
So How Do We Price These Triggers?
The combination of the above factors will imply 2020 RPS (revenue per share) of $9.95 per share. How much should the market pay for each dollar of Under Armour’s revenue? We look at the P/S (Price to Sales) trend for Under Armour and its competitors. While Under Armour’s P/S stood at 0.6, 0.7 and 1.6 in 2017, 2018, and 2019 respectively, the figure for its competitors Nike and Tapestry has averaged between 1.2 to 0.8. Thus, for Under Armour, we apply a P/S multiple of 1, to come up with a $10 price estimate. This is currently 18% above the market price. This multiple is a blended mix based on Under Armour’s historic figures, current trailing multiple, and forward looking multiple.
Are there any other stocks out there that can unlock value? The answer is yes! There are other industry stocks which have fallen significantly this year, but could bounce back just as easily. For instance, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.