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Why the CEO of Under Armour Inc. Should Sell Out To Warren Buffett

Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  )  CEO Warren Buffett is always on the hunt for new businesses to buy. With that in mind, I think Kevin Plank, the CEO of Under Armour (NYSE: UA  ) , should consider picking up the phone and calling the Oracle of Omaha. 

The elephant gun
In his 2010 annual letter, Buffett noted his focus was to increase the earnings of Berkshire Hathaway, and in order do that he said:

We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.

Much has been made of the elephant gun remark, and Buffett noted one of his disappointments in 2012 "was my inability to make a major acquisition. I pursued a couple of elephants, but came up empty-handed."

And while Berkshire Hathaway made a major acquisition in 2013 buying Heinz -- its 50% stake in the beloved firm is worth $12.1 billion -- he noted he was still on the "search for elephants," in 2014.

The elephant
When it comes to the elephant, Buffett notes Berkshire Hathaway is looking to spend between $5 and $20 billion, and "the larger the company, the greater will be our interest." At last check, Under Armour has a market capitalization of a little more than $12 billion, so even at a 50% premium, it would still fall within that range.

Buffett has also outlined the six fundamental criteria all must be met when Berkshire Hathaway makes an acquisition. And as it turns out, Under Armour meets every one of them. 

1. Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units)
Last year, Under Armour's income before taxes stood at $261 million. One down, five to go.  

2. Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations)
The bottom line at Under Armour over the last five years reveals it hasn't just been consistent in delivering strong earnings, but it's been consistent at significantly growing those earnings as well:

Source: Company Investor Relations.

3. Businesses earning good returns on equity while employing little or no debt
Under Armour has a minuscule debt-to-equity ratio of 0.15. In addition, it has a phenomenal return on equity of 17.8%.  

4. Management in place (we can't supply it)
The 41 year old Kevin Plank, founded Under Armour in 1996 and has served as CEO and Chairman ever since. Its CFO, Brad Dickerson, has been at the firm for nearly 10 years. Chief Operating Officer Kip Fulks, has been there since 1997. When you consider its top three executives have a combined tenure of 45 years -- albeit not exclusively as executives -- at a firm that has only existed for 18, there is no denying its management is "in place."

5. Simple businesses (if there's lots of technology, we won't understand it)
While it relies on technology and research to ensure it provides great products to its customers, at its core Under Armour makes apparel, footwear, and accessories, which are all simple and easy to understand.

Not to mention, Berkshire Hathaway already owns Brooks Shoes, so it isn't as though fitness apparel is something Buffett can't grasp.

6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown)
And here is where the question lies.

Unlike countless other billionaire investors, Buffett isn't one to engage in hostile takeovers or insist a firm give in to his demands. Instead, he seeks firms to approach him before joining the Berkshire Hathaway umbrella of companies.

Image Source: Coca-Cola.

Under Armour delivers remarkable answers across the other five criteria, but if this were to truly occur, Kevin Plank would have to be the one who approached Buffett with a the price for the company.

Buffett is known for his remark, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." One has to believe a phone call to Buffett would not only reward both Plank and shareholders of Under Armour thanks to a premium valuation -- after all, it does meet all five of the criteria handily -- but also Buffett and those of Berkshire Hathaway as well.

More ways to profit from Buffett's wisdom
While these six things are great, ultimately, Buffett buying Under Armour would only happen if Kevin Plank first called him. But the thing is, Buffett is happy to share his wisdom to anyone who will listen. In fact, Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2014, at 12:17 PM, DoctorLewis4 wrote:

    Berkshire Hathaway already owns Brooks - a beloved company by runners. Russell Athletics is also in the Berkshire family. So I think Berkshire has that space covered. Buffett also likes businesses that have a competitive advantage. As great a company as Under Armour is they have no competitive advantage over Nike or Addidas.

  • Report this Comment On March 31, 2014, at 11:31 PM, bigideaportugal wrote:

    Buffet's potential takeover companies in 2014



    3)Campbell Soup



    One of these 5 companies will be owned by Buffet in 2014!!

  • Report this Comment On April 01, 2014, at 11:27 AM, cdavissr wrote:

    this is a "foolish" article!!!!

  • Report this Comment On April 01, 2014, at 3:27 PM, HubbaBuba wrote:

    Indeed, this is the most "foolish" article I have EVER seen on MF!

    The odds of Buffet being interested in UA with a FORWARD P/E of 77 is less than zero. Truely you know nothing of the "value" that Buffet demands.

    One more time for the logic impaired: A share price with a forward P/E higher than the growth rate would require incredulous absurd contortions (sure, the "law of big numbers" don't apply and they can now ramp up to 77% growth and Nike will just let them!) in DCF assumptions. IT DOES NOT ADD UP ANYWHERE NEAR CURRENT NAV! He would never go for half that incongruity!

  • Report this Comment On September 22, 2014, at 4:10 PM, cdavissr wrote:

    Don't you have anything better to waste your time writing about. Why in the world would Keven Blank want to sell UA ?????? Sales will still increase 4x in the coming years.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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