Although legendary stock picker Peter Lynch hasn't been in the spotlight for many years now, his insights and experience are still very relevant.
Lynch, famous for guiding the Fidelity Magellan fund to market-beating returns from 1977 to 1990, excelled at identifying stocks with a long runway of growth ahead of them. It didn't matter to him if a stock's value had already increased sharply. If he thought it could still deliver the goods, then he'd buy it -- even if the prevailing market sentiment was to take profits and look elsewhere for outsized gains.
If Lynch was working on Wall Street today, then I bet that's exactly the way he'd feel about Under Armour, Inc. (NYSE: UA), the youth-oriented athletic wear retailer currently best known for stylish athletic pants, shirts, hoodies and other types of apparel.
While Under Armour is up a whopping 1000% since its NYSE debut in 2005, market sentiment could finally be turning against it. The stock is off 11% since peaking at more than $73 in late November, compared with less than a 3% drop in the S&P 500 during the same period.
The firm's latest achievement: Supplanting German sportswear giant Adidas, A.G. (OTC: ADDYY) as the No. 2 player in domestic sportswear in 2014, on roughly $3 billion in sales.
To be sure, Nike, Inc. (NYSE: NKE) remains as the industry's top dog, with roughly $30 billion in annual sales (nearly half of which comes from domestic sportswear). Yet Under Armour is growing at a more robust 30% pace, which suggests the revenue gap could close in coming years.
It will do so not only through further U.S. expansion, but by leveraging increased popularity in global markets. While international sales currently only generate 9% of total revenue, they doubled during the first three quarters of 2014 and management estimates they'll account for at least 12% of the top line in 2015. With its momentum gathering, the international segment could rise to one-quarter of Under Armour's overall business during the next five years.
To achieve global growth, Under Armour must maintain its aggressive marketing campaign, which has evolved as the company matured. Initially, the firm produced robust sales by focusing mainly on high school and middle school-aged youth. More recently, though, it has been increasing its influence through relationships with much higher-profile college and professional athletes.
In December, for example, management inked a four-year endorsement deal with Scottish tennis star Andy Murray to aid international expansion. Other key international marketing efforts include selling to European soccer and rugby teams, like the Tottenham Hotspurs, a popular London-based soccer club. In this case, Under Armour provides training wear for athletes and replica products for fans.
The company is also an official supplier of the Welsh Rugby Union and the Corporación Club Social y Deportivo Colo-Colo, a Chilean soccer club. It's beginning to establish a presence in other areas of Latin America, Asia and the Middle East, too.
Domestically, Under Armour recently obtained endorsement deals with superstar NFL quarterback Tom Brady, and his wife, supermodel Gisele Bundchen. The firm has been supplying footwear and gloves to the NFL since 2012 and has been marketing basketball footwear through the NBA since 2011. It's the official outfitter of several major college sports conferences, as well.
Since sportswear companies usually pay a premium for this sort of high-stakes marketing, investors can expect Under Armour to devote a large portion of total revenue to sales, general and administrative outlays (which include marketing costs). During the past 12 months, for example, the firm spent $1.1 billion, or 39% of revenue, on SG&A.
Looking ahead, it also aims to invest in its fast-growing footwear business, where year-over-year sales climbed 50% in the latest quarter. At only around 13% of total revenue, this business should have massive future potential. That assumes that Under Armour maintains leading edge designs, helping the company to compete head-to-head with Nike.
Besides keeping the traditional football, baseball and basketball footwear lines up to date, management plans to expand the running shoe category, as well as the firm's offerings of boots and other types of everyday footwear.
The women's segment, which includes products such as sports bras and compression shorts, contributes roughly 30% of revenue. Management believes this segment will generate $1 billion in annual sales by 2016. CEO Kevin Plank sees the segment eventually becoming at least as big as the men's sportswear business, perhaps even bigger. After 18 straight quarters of at least 20% overall revenue growth, Under Armour should reach its next target of $4 billion in total annual sales by 2016, as well.
Risks To Consider: Under Armour's business tends to be seasonal, with the majority of revenues and a large portion of income coming in the third and fourth quarters. Below-par seasonal performance can easily translate to a bad year overall.
Action To Take --> Ignore the market's recent rejection of Under Armour, just as Peter Lynch would. The firm still has many exceptionally robust years ahead of it and can meet consensus projections for 25%-a-year earnings growth. Thus, per-share profits could rise to $2.57 from the current $0.84 during the next five years. Assuming a price-to-earnings ratio in the historic range of 52, this implies stock price appreciation to $134 a share, about double the current price, by 2019.
Because shares are so pricey -- the P/E is currently 78 -- potential investors should consider starting with a small position and building up over time, buying on the inevitable dips common in growth stocks with such high valuations.
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