UA - Market Share Math Matters

Takeaway: If people believed UA's guidance, it'd be a $35 stock. Need to justify nearly $2bn in extra market share to back into current valuation. No.

Conclusion: Can't say enough great things about UA executing on its model. But the reality is that long-term guidance and consensus estimates explain away $35 in stock price. Unfortunately, UA is at $65. To justify the other $30 per share in value, we need to assume that UA grabs nearly $2bn in market share globally above and beyond current expectations. While UA is definitely a long-term winner, the market already knows this. We're still watching it from the sidelines, but if we had to go one way or the other, we'd be short.



There's no company we can find that compares to UnderArmour as it relates to having such a disparity between market value and its competitive position.  To it's credit, UA has not only taken a page out of Nike's playbook, but it's the only brand to rewrite it, and execute on it year after year without missing a beat. In the first 30 years of Nike's life it was good for a foul-up every 2-3 years. UA is delivering the consistency that Nike never did. 


But the reality is that if the market believed UA's guidance or Street estimates, this would be a $35 stock. So there are really two questions from where we sit. 1) Does the company REALLY believe that the guidance it handed out for next year is for real (and not a colossal sandbag)? And 2) with the stock at $65, what are the market's real expectations for both market share and margins, which will implicitly explain-away the extra $30/share in equity value that the market is fronting UA.


The short answers are 1) No, UA does not believe its guidance, nor does the market. 2) By our math, the current share price suggests that UA will capture an incremental $1.95bn in revenue by 2018, or an extra 50bps of share, which sounds easy until you factor in that its current share base is only 1.0%.


Let's look holistically  at the company's market share.  We can pick apart the US share, including the fact that UA just surpassed Reebok and is now the sixth largest footwear brand with 3.0% share (Reebok at 2.8%). But we think that the better way to look at this is on a global scale. After all, growth is incrementally coming from  International, which nearly doubled in the quarter. 


The chart below shows three things; 1) UA Apparel/Footwear market share based on the company's guidance/consensus estimates, 2) Hedgeye's estimates for market share, and 3) the share UA needs to hit in order to justify a $65 stock price.  What does market share tell us about UA’s current valuation?


1) We definitely respect the 'execution premium' for a quality story like UA. But for a stock that's trading at 70x ’14 numbers we need to look at share assumptions.

2) First a few key points and assumptions.

a) Over the past 5 years UA has traded on average at 35x NTM earnings

b) The 5 year earnings CAGR over that time period has been 31%

c) The point here (and one of the assumptions in our long term model) is that UA has traded at a 1.1x PEG.

3) The global athletic footwear and apparel market was a $38.4 bil industry in 2013; including, Nike, Inc   (15%), AdiBok (10.8%), VFC (3.1%), KER (2.1%), and Asics (1.5%). UA currently sits in 8th place on that list at just over 1.0%. We think the industry will grow at a 6% CAGR over the next 5 years, but on top of that UA will have to accelerate market share gains considerably to justify the current price. From 2007 through 2013, UA stole an average of 11bps in market share per year. To be fair, the slop of the line has looked much more exponential than linear.

4) If we were to simply 'extend the trend' (which we don't do) and extrapolate past trends into the future,  then we get the gray column in the chart below.

5) The column shows our estimate, as UA will be paying up in Selling and Marketing to facilitate it's share gain.

6) The blue column represents what the market is baking in to UA's valuation right now, based on an EBIT margin midway between where UA and Nike are today.

7) All in, we're looking at $1.95bil in sales at the cash register. Assuming that 25%+ comes from UA's own DTC network, that shows up on the P&L at $1.5bil.


UA - Market Share Math Matters - UA market share


In our analysis, we assume that EBIT margins go up to 12% -- but never higher. The reality of UA's growth is that it is becoming increasingly expensive. Footwear is a massively consolidated space with higher barriers to entry.  International is lower margin due to the nature of distributor model UA is running. But more importantly, the brand needs to establish relevance with a few hundred million consumers who don't know it exists. That takes both time and capital. 


In addition, UA is getting to the point where it is playing more aggressively with the big boys in the Athlete endorsement game. Note that with Kevin Durant, UA's bid represented a 34% increase to its athlete endorsement budget. Nike, who 'won'/kept Durant, boosted its budget by about 1%. Nike and Adidas will continue to drive the price of these assets on a global scale, and UA increasingly can't afford not to play if it wants to grow its top line.


As it relates to our estimates, we're above the Street, which is entirely due to revenue growth. But our gross margins are considerably lower, and SG&A much higher than company guidance.


UA - Market Share Math Matters - ua financials 2

Cartoon of the Day: Yelp

Cartoon of the Day: Yelp - YELP cartoon 10.23.2014


Yelp stock is plunging today following this morning’s earnings report when management guided revenues lower for the fourth quarter. Hedgeye Internet analyst Hesham Shaaban has been the bear on Yelp all year long.


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A Close Look at the Jobless Claims Numbers

Takeaway: Here’s our take on this morning’s jobless claims report.

Seasonally-adjusted initial jobless claims rose +17K W/W to +283K with the 4-week rolling average improving to +281K – the lowest level since 5/5/2000. 


Non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, were better by -18% year-over-year (vs. -24% prior and -23% 2-wks prior) with the 4-wk rolling average improving to -18.4%. – the best rate of improvement since the immediate post-recession period in 2010. 


It’s worth noting that the recent improvement has come against increasingly easy comparisons in 2013 (see black line in chart below) and is likely to moderate from here. 


Summarily, while the domestic labor market data has remained somewhat of an insular island of strength in the global macro landscape in recent months, it continues to fire on 1.5 (of 2) cylinders as the separations side of the net hiring equation plumbs new lows while gross hirings remains more moderate.  


Sustained monthly payroll gains of ~250K with peak year-over-year growth in NFP employment of 2-2.5% have marked the top end of the range in recent market/economic cycles.   We remain proximate to both levels currently.  #PeaksAreProcesses


A Close Look at the Jobless Claims Numbers - Claims SA 102314

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EVENT: YELP Flash Call Tomorrow (1pm EDT)

Takeaway: We'll be hosting a quick call rehasing our original our Short thesis, with incremental analysis, and outlook for 2015.

EVENT: YELP Flash Call Tomorrow (1pm EDT) - HE IM YELP death

Hedgeye's Internet & Media Team, led by Sector Head Hesham Shaaban, will be hosting an update call to their SHORT Yelp (YELP) Best Idea.  YELP's business model is broken; we're already seeing signs of deterioration, which will only get worse in 2015.


Join us as we update our bearish thesis and why we see an additional 30%+ downside from here tomorrow Friday, October 24th at 1:00pm EDT.




  • Extreme Attrition Rate: It will only get worse from here
  • Insufficient TAM: is not the low-hanging fruit, it's a pipe dream
  • 2015 Will Be Much Worse: Consensus estimates are unattainable


Takeaway: Q3 beat, conservative guidance, and Oct looks stronger

A more positive tone than recent calls



Introductory Remarks

  • Despite challenging environment, solid results prudent variable cost mgmt delivered margins
  • Key events in Q3: opening of Zia Park Hotel and Dayton Racino and opened Mahoning Valley
  • Both Ohio Operations off to solid starts
  • Upstate NY: Decision shortly after election day
  • Proceeding with Jamul Indian Village - mid 2016 opening

General Trends & Results during Q2 2014

  • Challenging consumer environment but solid margins
  • Less negative trends evident in database: visitation and spend improved slightly sequentially at mid, low and unrated segments
  • Horseshoe opening on Aug 22 no material impact to Charlestown to date
  • Slight margin improvement in all regions (excluding 1x expenses)
  • Reduced corporate overhead by 20% YoY
  • Strong opening at 3 new assets, pleased with aggregate results though composition different as Mahoning stronger, Dayton slower ramp
  • Dayton 1x promotional error - impacted net slot by -10% 
  • $2.3 million of MA lobbying expense not contemplated in guidance
  • Q4 guidance - conservative stance due to openings

Q4 2014 Guidance

  • Includes no spend for MA campaign
  • Unchanged but for "beat"
  • Process unchanged and consistent with trends for 2014
  • Dayton and Mahoning - original estimates remain valid
  • $10m+ revenue beat = $6.5m EBITDA beat 
  • Cash $237m at end of Q3
  • Maintenance $21.4m, $78.3 for year
  • Cash tax rate 38%
  • Pre-opening expenses $5.7m in Q3

MA Campaign Update:

  • Current Boston Globe survey 53% NO and 39% YES for repeal
  • Fire & Police Unions support PENN and gaming association
  • Remain hopeful for positive outcome


Q: Modest improvement in lower end of database, color/why/where?

  • Slight improvement, down YoY, but less negative than Q2 and Q1, not bottomed out, not stabilizing, but sequential improvement

Q: Traffic vs. ticket of lower rated play?

  • Not seeing growth in non-rated or lower rated in both spend and visitation but seeing less decline.  October is shaping up like Q3 - Hedgeye is seeing better results thus far in October

Q: What see at M Resort and Zia Park hotel?

  • Strong visitation at Zia and spend per trip is +50% from typical trip value, strong cash market, weekends very strong. Zia depends on feeder markets from Western Texas, strong slot play from Western Texas markets
  • M Resort: LV locals stable, more rationale on reinvestment, improvement in couple database metrics in Q3

Q: in 2015, easy comps in Q1 - increased confidence?

  • Hope 2015 weather impact less impactful, especially beginning in December. 
  • Not see + or - impact from gasoline prices - Should be positive if sustained
  • Hope Q1 show some improvement vs. 2014, beyond Q1 weather difficult to assess and predict.
  • 2015 hopeful due to maturity of recent openings.

Q: MA opening - how long expect to operate without competition?

  • Expect June 2015 opening and 2.5 to 3 year operations without competition from either MGM or WYNN

Q: How much of EBITDA out performance came from new racinos vs. mature properties?

  • Charlestown and Penn National solid and drove beat, Mahoning Valley stronger especially end of September and early October.  As much large property out performance as racinos.

Q: Underlying trends at Columbus and Columbus vs. Dayton cannibalization

  • Columbus a deep market, similar to Kansas City.  Believe in Columbus, long runway for growth.  Database trends encouraging across all segments.
  • Some Columbus customers from Dayton.

Q: Southern Plains segment - how control costs given moving parts

  • States MO and IL report on gross revenues = 5 properties, on net-revenue declines less. Cost controls focus on labor, marketing and facilities to less extent. 

Q: What the promotional environment

  • Steady across markets except for Missouri which was elevated in Q3

Q: Capital allocation

  • Fund acquisitions with debt, need to look at all opportunities to grow and grow beyond current development pipeline.

Q: When does a share repurchase become a more material consideration

  • Consider on a regular basis and have discussed over past year with the Board, but still see growth of asset base as best opportunity

Q: Cost reductions, operational/overhead, for add'l margin improvement and flow through

  • More challenging if revenue declines continue, always focused, if Q1 revenue improves then should see strong flow through give tight cost controls

Q: Sum total of 2104 one-time costs not recurring in 2015 such as MA spend

  • Address off line, separately.

Q: MA indication of Plainridge carve out of Appeal passes

  • Focused on getting vote out

Q: Upstate NY, if awarded license, how think about competitive license - scenario to reconsider

  • Depends on where licenses get allocated, believe Catskills will get two licenses one in Orange County and one Sullivan County.  If fortunate to receive Orange County will proceed with development.

Q: By the time MGM National opens, Baltimore casinos open for four years, what incremental impact to Charlestown from MGM opening

  • Given past openings, not expect significant. Database is Maryland focused, expect some portion of impact.

Q: Historical racing opportunity and legislative outlook in Texas

  • Gubernatorial race could turn Texas more conservative politically.
  • Historic wagering is separate from Class 3 efforts
  • Pending litigation on historic wager and waiting for the legal process to conclude.

Q: When look at Baltimore what seeing in promotional activity

  • Difficult to predict due to two months of activity from Horseshoe but not seeing high level of reinvestment at Horseshoe as saw at prior openings. Maryland tax rate higher, so more difficult to reinvest.

Q: Leverage considerations vs. other capital projects/acquisitions

  • Long term lease at 8x multiple.  Leverage ratio well within comfort levels as well as bank agreements at 6x with long-term lease.  Current situation is comfortable and expect to maintain.

Q: If a large scale acquisition presented, would use equity?

  • Not likely, historically use debt to finance historic acquisitions or green field developments.


CAT: 2015 Estimates Going Lower? (pre-call review)



The next major data point for CAT shareholders is the January 2015 EPS guidance with the 4Q 2014 report.  The 2015 sales guidance and other details in today’s release suggest we should see downward 2015 revisions.  The drivers of the 3Q beat are unlikely to be sustainable. 


A pre-buy in E&T ahead of 2015 emissions regulation on very large engines (e.g. gensets and locomotives) and a sizeable year-on-year inventory swing appear to have been major contributors.  As for the E&T pre-buy, a 33% sales gain in North America, where the emissions regulations are pending, sticks out.  Backlog was sequentially higher, but on an “early order” incentive program and reciprocating engines orders.  Neither of those would be positive for 2015, as early order programs usually involve discounting and reciprocating engine orders may relate to the pre-buy, which pulls demand forward. 


While the headlines for 3Q 2014 are positive and management has done a good job of delivering results this year, we expect CAT shares to trade on what happens with the 2015 outlook going forward.  Management may be starting to nudge 2015 expectations lower.



Key Takeaways

  • E&T Pre-Buy Seems Pretty Obvious:  Should investors extrapolate Energy & Transportation (E&T) segment’s performance into 2015?  We think it is partly related to a pre-buy ahead of 2015 Tier 4 Final emissions regulations.  North America’s rapid sales growth is a noteworthy hint, since that is the geographic region with new emissions regulations in 2015.  Record margins also match a pre-buy, and are unlikely to be sustained in 2015.  2015 looks set to have a post pre-buy bust in North America, potentially amid weaker oil & gas demand.  


CAT: 2015 Estimates Going Lower? (pre-call review) - ga1


CAT: 2015 Estimates Going Lower? (pre-call review) - ga2


  • Sequential CAT Inventory Build:  At the company level, CAT built inventory from 2Q 2014 to 3Q 2014 ($13,055 mil in 2Q 2014 to $13,328 mil in 3Q 2014) vs. a destock in the year ago period ($13,889 mil at 2Q 2013 to $13,392 mil in 3Q 2013).  The comparison adds to the lower dealer destock, which was $200 million less of a draw vs. the year ago period.  In total, dealer and company inventories had a combined swing of nearly $1 billion vs. 3Q 2013, by our estimates, which likely had a meaningful impact on production costs. 
  • Resource Industries Competitive Pricing:  RI continued to struggle in 3Q 2014, largely consistent with expectations.  Two comments in the release are worth noting, however.  First, CAT noted that “Price realization was unfavorable primarily due to an increasingly competitive pricing environment.”  The language suggests pricing pressure is ongoing, which is consistent with our understanding.  Second, we would also note that dealer inventory was a “less significant” headwind that in the year-ago period.  Combined with what may have been CAT level inventory gains, underproduction may have been less of a headwind.  The cessation of underproduction has been expected to improve RI margins, but didn’t seem to matter this quarter.

 CAT: 2015 Estimates Going Lower? (pre-call review) - ga3


  • Construction Industries (CI) Margins Trending Lower From Record Levels:  While we expect CI to remain a relatively strong performer for CAT in 2015, margins have trended lower without large dealer inventory builds.  We suspect margins vs. the year ago period benefited from CAT’s own sequential inventory build.

CAT: 2015 Estimates Going Lower? (pre-call review) - ga4





CAT investors should increasingly focus on 2015 expectations, which management seems to be pushing lower.  Initial 2015 sales guidance and evidence of a Tier 4 pre-buy is not a favorable set-up, 3Q 2014 beat or not.  


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