Conclusion: I simply can’t be long UnderArmour. As my Dad once told me, “There’s a difference between not seeing anything, and seeing nothing.” When I took UnderArmour off as Best Idea Short on Sept 24th I did not see how being short UAA after a 45% ytd hit while the bearish fundamental call had become consensus made any sense in the world. I went long, while vetting THE KEY QUESTION that could have led to a Best Idea Long headed into 2018 -- i.e. will this go the path of Nike or Reebok. Based on what our research #process tells me today, I'm leaning Reebok. Only Plank can tell, and I'm not holding my breath.
To be clear, this is my least favorite kind of call – the “strongly recommend doing nothing” call. But based on what I know today, I’d go short again if the stock gets a $2-handle. Better yet, I’d buy LULU – like, now. LULU is better positioned, more defendable, has a more loyal customer, a far better earnings trajectory (near term and long term), and is breaking out to the upside after being land-locked w EPS between $1.85-$2.25 for six years…and if mgmt fails we’ll see a change in 6-9 months’ time. Can’t find that in Baltimore.
-- McGough
When I pulled a 180 on UA three weeks ago, I set myself on the path in answering the only question that matters…“Will one of the most powerful consumer branding successes of the last decade…
a) Retrench and reinvest in a new structure that will take it the way of a ‘mini-Nike’ and layer on another $2-3bn in sales at a mid-teens margin and $2.00+ EPS? [There’s your $50 stock.]
b) Or will it become Reebok? …a once great brand with structural inhibitors to grow profitably, and in need of a capital infusion with new talent to profitably execute against a plausible growth strategy. The Reebok path will/would lead UA to trade-off margin vs sales vs asset turns in any given year, and keep EPS locked +/- $0.00 in perpetuity with an increasingly levered balance sheet, and stagnant/declining ROIC. [Do the growth Bulls really want to see such an entity valued on earnings? There’s your single digit stock.]
After three weeks of research, I don’t see anything that could possibly lead me to look a PM square in the eye and make a bullish call on this stock today. I very much thought my team’s process would give us the ammo to go all out with a ‘load up on UA in 2018’ call. In the back of my mind, I hoped that’s what the research call would tell me. But hope is not an investment #process.
Only Kevin Plank can answer the ‘Nike vs Reebok’ call. But if I were debating him today, I’d place my bets on Reebok – like, an early 2000s Reebok where then CEO (Paul Fireman) kept hope alive while he shopped it to Adidas. The only difference is that there’s arguably no call option for UA being Acquired and/or Sold. Kevin Plank and I aren’t exactly on each other’s Holiday Card lists, but I’m willing to bet that he has ‘valuation memory’ with a though process that sounds something like ‘At $52, my stock traded at 50x EBITDA and 75x earnings. It got there once, so it will get there again.”
If there is a compelling operational change agent at UA that is coming down the pike, then I’ll be dead wrong in not going long this stock BIG. If you have that edge, then great – knock yourself out. I don’t have it nor do I want it.
This is a great brand that could become a great company, and ultimately a great stock. It’s got all the tools – the edginess, the passion, and the consumer connectivity. But the output of our research process simply isn't giving me the confidence I need that sales and earnings will recover to a level that I need to pound the table -- over a TREND or TAIL duration.
To be clear, this is my least favorite kind of call – the “strongly recommend doing nothing” call. But based on what I know today, I’d go short again if the stock gets a $2-handle. Better yet, I’d buy LULU – like, now. LULU is better positioned, more defendable, has a more loyal customer, a far better earnings trajectory (near term and long term), and is breaking out to the upside after being land-locked w EPS between $1.85-$2.25 for six years…and if mgmt fails we’ll see a change in 6-9 months’ time. Can’t find that in Baltimore.
