Is Under Armour Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Under Armour's (NYSE: UA  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Under Armour's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Under Armour's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Under Armour's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Under Armour managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Under Armour's key statistics:

UA Total Return Price Chart

UA Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue Growth > 30%

112.9%

Pass

Improving Profit Margin

3.4%

Pass

Free Cash Flow Growth > Net Income Growth

33.4% vs. 180.7%

Fail

Improving Earnings per Share

165.8%

Pass

Stock Growth (+ 15%) < EPS Growth

268.4% vs. 165.8%

Fail

Source: YCharts. *Period begins at end of Q3 2009.

UA Return on Equity Chart

UA Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving Return on Equity

43.7%

Pass

Declining Debt to Equity

98.3%

Fail

Source: YCharts. *Period begins at end of Q3 2009.

How we got here and where we're going
Growth stock superstar Under Armour may be getting a bit ahead of itself as it earns four of a possible seven passing grades. Two areas of concern are the company's free cash flow, which hasn't kept pace with net income growth at all, and its stock price, which has exceeded EPS gains by over 100%. Will Under Armour be able to justify its soaring stock by the next time we review its progress? Let's dig deeper.

Under Armour has been a polarizing stock for our Foolish analysts. Analyst Joe Tenebruso calls it "Tier 1," which as you might expect, is the best tier. Contributor Robert Eberhard has had his eye on the stock for a long time. Contributor Amanda Alix is keen on the company's great marketing muscle and consistent innovation.

On the other hand, contributor Tamara Rutter thinks Under Armour is a step behind yoga-pant dynamo lululemon athletica (Nasdaq: LULU  ) . Fool contributor Dan Carroll thinks you should simply get rid of Under Armour altogether. Who's right? Well, everyone may have a point, but the market can't listen to everyone.

Under Armour's progress and financial metrics look a bit closer to Nike's (NYSE: NKE  ) than to lululemon's. Its profit margins are weaker than both, but its growth rate has consistently outpaced every company in the fitness-apparel industry not named lululemon. The problem with high growth rates, however, is that they can quickly become baked into a stock's expectations, and any perceived weakness is quickly pounced on by short-sellers. That seems to have been the case with Under Armour's latest earnings report, as investors pounced on one piece of bad news as an excuse to flee. The company still had a better quarter than Nike, which is more reliant on international sales that have been slowing for some time.

Under Armour's expansion remains heavily dependent on sales from Dick's Sporting Goods (NYSE: DKS  ) and Foot Locker (NYSE: FL  ) , with which it has developed store-within-a-store sales channels. On the other hand, Under Armour has been making great strides selling its products directly to consumers, with a quarter of revenue in its latest quarter coming from direct sales. Under Armour has the brand strength to attract many consumers to more profitable channels, but it'll have to stay on top of fitness trends to maintain its loyalties.

Putting the pieces together
Today, Under Armour has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Under Armour's style has helped it become one of the country's most impressive retail stocks. It's not alone -- many companies try to reach the top of the retail heap, and a few succeed now and again. The Fool covers "Three Companies Ready to Rule Retail" in an exclusive free report, with detailed insights into what makes each of their stocks a great buy today. Want to find out more? There's no cost and no obligation to read this report in full. Simply click here for the information you need.

Keep track of Under Armour by adding it to your free stock Watchlist.


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