Under Armour (NYSE:UA) has been an enormously profitable investment over the long term, as the company has grown at amazing speed and delivered extraordinary financial performance for investors. However, trading near all-time highs, Under Armour is priced at a considerable premium versus competitors such as Nike (NYSE:NKE) and lululemon athletica (NASDAQ:LULU). Does Under Armour still have room to run, or is it too late to buy the stock?
Under Armour has been one of the most explosive growth stories in the consumer sector over the last several years. The company is focused on high-performance sports apparel, footwear, and accessories, it has a reputation for quality and innovation, and the brand is gaining recognition at a remarkable speed.
Under Armour is led by founder and CEO Kevin Plank, who has a relentless expansionary drive. Plank aims to sustain annual sales growth of at least 20% over the next several years, and he believes Under Armour will become a $10 billion brand in the future. Growth plans may seem ambitious, but the company has proven its ability to generate extraordinary results over the years.
Under Armour has delivered a compounded annual sales growth of 26.3% over the last five years, while earnings per share have increased at an even more impressive 31.6% annually. The company continues running at full speed: As of the last quarter, sales during the first quarter of 2014 increased 36% year over year, to $642 million.
Under Armour delivered expanding profit margins during the quarter, a strong indication when it comes to evaluating pricing power and demand strength. Gross margin increased to 46.9% compared to 45.9% in the prior year's quarter, and earnings per share jumped by 71% versus the same quarter in the prior year.
While Under Armour's performance has been nothing short of astonishing over the last several years, the stock is trading at big premium versus the competition. Under Armour trades at a forward P/E ratio of nearly 50.9 times earnings estimates, versus forward P/E ratios in the neighborhood of 20.1 and 20.3 for Nike and Lululemon, respectively.
This is not a straightforward comparison, though, as the three companies are very different when it comes to performance and potential for growth over the coming years.
Nike is the undisputed leader in the industry; its brand power, marketing resources, and wide global reach provide rock-solid competitive advantages for the company. Nike has recently announced healthy results for the quarter and full year ended on May 31, confirming that this global powerhouse still has a lot to offer in terms of growth.
Nike reported an 11% increase in sales during the quarter, to $7.4 billion. Future orders grew 11% versus the same quarter in the prior year, or 12% when excluding currency fluctuations, so demand over the medium term looks quite solid, too.
On the other hand, Nike is more than 10 times bigger than under Armour in terms of revenue, so it can hardly generate the same level of growth. For a company of its size, Nike is doing really well, but the company is no match to Under Armour when it comes to growth potential.
It's a very different story for Lululemon. The company is still trying to overcome slowing sales growth and accelerate performance. Problems with product quality and public relations missteps have hurt Lululemon's image and reputation lately, and financial performance is under pressure.
Sales during the quarter ended on May 4 came in at $384.6 million, a solid 11% increase versus the first quarter of fiscal 2013; however, comparable-store sales increased by an uninspiring 1% during the period. Furthermore, Lululemon cut its forward-looking guidance for the fourth consecutive quarter, signaling that the company can't find a way to sustainably accelerate growth.
Under Armour's valuation premium versus its competitors is easy to justify when looking at past or present performance. However, investment decisions need to be based on the always uncertain future, so the main question for investors is whether the company can continue generating enough growth to justify its valuation.
Fortunately, Under Armour has enormous room for expansion, and the business is firing on all cylinders in multiple areas. Management has highlighted running, golf, and outdoors as three especially promising categories in the medium term, and the company is barely taking the first steps when it comes to expanding into different sports.
Women's products and shoes in different categories are exciting opportunities for Under Armour, and international markets are still practically untapped. Sales in international markets jumped by an explosive 79% during the last quarter, so the business is clearly firing on all cylinders on that front.
Overall, Under Armour has considerable room for growth and the right attitude to capitalize on its opportunities. According to CEO Kevin Plank: "Whether it's categories like running, golf and outdoor, key growth drivers like women's and footwear, early stage businesses like basketball and Connected Fitness or new markets like Brazil and China, it's equally clear that the opportunities for the Under Armour brand are abundant and our philosophy around growth is unchanged."
After such an impressive run over the last several years, Under Armour is materially more expensive than competitors Nike and Lululemon. Aggressive valuations are always a source of risk, and the stock is vulnerable to any disappointment that may occur down the road. However, Under Armour is clearly performing extraordinarily well, and it still has enormous room for expansion. This dynamic growth company is running a marathon, not a sprint.
Andres Cardenal has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.