UA: Reasons to Revisit the Long Side
In my conversations over the past 2 weeks, one thing is clear about UA – sentiment stinks. Here are some reasons why I think it’s worth revisiting UA on the long side.
- In this climate, I like names that can drive the heck out of the top line mode. UA has been investing in the right areas to do so for the past 3 years. Footwear might not have its big breakout until 2011, but it will begin to accelerate this summer. That’s enough for me.
- The cycle for this space is at the start of a 2-year upswing. All boats will rise. It will be product-driven, which will be the tail wagging the dog – and is misunderstood. I’ll never bank on a cycle hoping for consumer preferences to change. But after capacity has been pulled from the market (stores), the brands have invested in the R&D, the goods on the water, and the marketing dollars ready to spend, this will all synch. Sports Authority will go public later this year. Dick’s will comp higher. And yes, doggy FL will work. That’s good for all, including UA.
- Funny how people beat up UA in the past when Europe was strong because UA failed to really penetrate that market (yet). Are investors going to tout that now the company lacks exposure to a market that the world is waiting to implode? Probably not. Well guess what…if we see broad-scale downward revisions due to Europe, UA won’t be included.
- The stronger dollar allows UA to opportunistically put capital to work in Europe today – which they are, in fact, doing.
- The quarter I was concerned about this year just passed. Growth should accelerate from here.
- I’m only a few percent above the Street for this year – but have an upside bias’ to my $1.12. Next year I am at $1.70 vs. the Street at $1.27. If I’m right, then this stock is going parabolic.
- Mind you, my estimate still has UA at less than a 12% EBIT margin. This name is all about sheer unmitigated top-line growth.
- Sell-side ratings remain net negative (only 5 out of 25 are Buy), and short interest near 15%. I like that.
- The biggest negative? Nike announced at its analyst meeting that it will grow its apparel R&D by a factor of 4x this year. Even though that’s coming off a 50% cut last year, this is still a force to be reckoned with. Nike is not very good at losing anything. But I’d consider several factors…
A) Nike has 50% of the US athletic footwear market, and about 35% of the market globally. UA has less than 1%, and there are only 2-dozen brands that make up 95% of the market. In apparel, Nike is less than 10%, UA is low single digits and there are hundreds of brands that compete. Both of these companies could grow apparel double-digit for years without even touching the other.
B) More R&D at one company helps the space. As noted, all boats rise. Why has the athletic space been in a funk for 3 years? Innovation has been nada. Why? The demise of Adidas/Reebok after the merger in 2005 took away all incentive for Nike to plow capital back into the market. That was also when Nike management was transitioning (remember Bill Perez?!?). It was simply a different time. R&D and product capital reaccelerated about 9 months ago, which means that product comes to market starting this spring.
C) In this space, the brands compete on product, not price. Athletic shoes and shirts are not like lightbulbs at Home Depot or data storage devices at Best Buy. The vendors drive the ship. The tail wags the dog.