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.
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.