2 Convincing Reasons Baird Thinks You Should Stick With Under Armour

Despite weaker fundamentals, Baird sticks with its Outperform rating on Under Armour Inc UA UAA as it feels the brand value remains in favor, and management has the will/fortitude to turn the ship.

Under Armour, the athletic footwear maker, issued a disappointing fourth-quarter report and 2017 outlook, limiting its near-term visibility.

Analyst's Commentary

“Positively, we think the current pain could prove a longer-term blessing, as UAA appears more focused and is pursuing Opex/Capex efficiencies which could enhance operating leverage when sales improve, support improved FCF, and drive a bottoming of ROIC in 2017,” analyst Jonathan Komp wrote in a note.

Komp noted that Under Armour’s issues were somewhat similar to the hiccups that stalled the growth of rival Nike Inc NKE in the late 1990s. Nike also faced a steep downturn in the late-1990s only to come out as a much stronger company.

“[S]ince NKE's stock performance has directionally followed ROIC over time, we are hopeful that stable-to-improved ROIC for UAA in upcoming years can be a good indication for the stock,” Komp highlighted.

Investors always felt Nike as the whitespace opportunity for Under Armour. Komp said following the recent pullback, Under Armour shares currently command a market capitalization that is only about 10 percent of that of Nike, while Under Armour's trailing 12-month revenue and EBITDA is 14 percent/11 percent of Nike.

“The last time this occurred (relative market cap < relative sales/profit) was around the 2009 bottom for UAA,” Komp added.

Komp, who has a price target of $25 on Under Armour shares, feels the recent downturn is only a temporary disruption and not deterioration of brand fundamentals.

Shares of Under Armor closed Wednesday’s trading at $21.44. In the last one year, shares have dropped 75 percent.