With its innovative moisture-control products, Under Armour is well-positioned to become a major player in the $12 billion market for active apparel. However, it has earned only $22 million in net income in the last 12 months, and its $1.68 billion enterprise value is based primarily on expectations of future growth. So investors need to ask, how much will Under Amour grow? Management has promised eye-popping short-term growth of 57% to 62% for this year, and Wall Street analysts are forecasting 25% to 30% growth over the next three to five years. However, Fools know better than to simply trust management or Wall Street.
A much better way to understand Under Armour's potential is to use historical perspective: Look at similar companies when they were comparable in size to Under Armour. For instance, many supporters claim that Under Armour is the next Nike
So five years of 30% annual growth for Under Armour is a fairly reasonable expectation, especially considering that Nike isn't the only example of a branded apparel company growing in that range. Reebok averaged 48% annual revenue growth from 1985 to 1990, Tommy Hilfiger
The problem is that the growth rate is already priced into Under Armour's stock. With a P/E ratio of 75, Under Armour needs to average 30%-plus growth just to meet investor expectations. Assuming that it grows its EPS by 30% for five years and the P/E contracts to 30, the stock would go from $37 to $58. Over five years, that is only a 9% annual return for investors, which is fairly poor for a small-cap growth stock. Investors buying Under Armour at recent prices need to believe that the company will grow at a rate higher than 30% for the next five years.
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