Under Armour Stock Has The Most Downside Risk In A Struggling Space

Under Armour Inc UAA's ongoing struggles within the apparel and athletic category have been well communicated to investors, and the stock has been hard hit throughout 2017. Yet among the athletic-focused group, Under Armour's stock comes with the most downside risk, at least according to Wells Fargo's Tom Nikic.

Nikic downgraded Under Armour's stock rating from Market Perform to Underperform with a price target slashed from $17 to $13 amid four major headwinds, including:

1. An overall shift in trend from Under Armour's forte of performance to more of a fashion perspective.
2. Over exposure to the struggling North American market as up to 85 percent of total revenue comes from the region.
3. Under Armour's fourth quarter growth plan seems "unlikely to be achieved."
4. The stock's valuation is still "quite lofty" at 40 to 45x fiscal 2018 EPS estimates.

Investors thinking that these headwinds are only relevant in the short term might be wrong, Nikic continued. Under Armour's woes are likely to persist into 2018 and any improvements in the business are unlikely to be large enough to offset the decline.

Also, Under Armour could be aggressively buying inventory under expectations that it will achieve its mid-20s sales growth outlook in the fourth quarter, the analyst added. The problem is if the company falls short, which the analyst sees as being a likely outcome, management will have to deal with an inventory overhang. As such, EBIT for the year could decline up to 35 percent, which would mark the first time since 2008 EBIT hasn't improved.

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4 Reasons Sell-Side Is Questioning Under Armour's Long-Term Story ____________ Image Credit: By Geoff Livingston from DC, USA - Congratulations to Michael Phelps, CC BY-SA 2.0, via Wikimedia Commons