I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.
Next up: Under Armour
|CAPS rating (5 max)||****|
|Bullish pitches||428 out of 477|
|Highest rated peers||Weyco Group, LVMH Moet Hennessy, Delta Apparel|
Data current as of Jan. 28.
Enthusiasm for Under Armour escapes me. I've never understood the company's competitive advantage. The clothes and shoes are great, sure, but materially better than alternatives? I don't see how; Fools think I'm not looking hard enough.
They may have a point. Last week, Under Armour easily bested Wall Street's average fourth-quarter earnings estimate. The company delivered $0.44 in profit, $0.07 a share more than analysts were calling for. Revenue soared 36%, and the stock shot up 11% on the news. This is what happens when bulls get emboldened.
"With a niche of sporting equipment that will never go out of style, unless kids, adults and the pros stop playing sports, their inventory will always have value, further strengthening their balance sheet. Under Armour is poised to take a sizable chunk of Nike's
In that contest, Under Armour outfitted winning Auburn, while Nike outfitted runner-up Oregon. Each brand scored tens of millions of dollars' worth of marketing airtime during the game, but it's Under Armour that recently inked a long-term deal with Auburn. Today, it looks like a winning arrangement.
The elements of growth
|Normalized net income growth||32.2%||17.9%||(21.5%)|
|Shares outstanding (in millions)||51.1||50.2||49.3|
Source: Capital IQ, a division of Standard & Poor's.
And that's not all investors have to cheer about. Under Armour has spent years putting up mostly good numbers. Let's review:
- Accelerating revenue growth combined with rising gross margins suggests two things. First, demand is rising. Second, Under Armour is seeing pricing power in its core business.
- Normalized net income is rising even faster. A 2008 reversed into a big 2010 gain. Growth investors like me love to see this sort of trend. When combined with accelerating revenue, it tends to reflect leverage in the business expressed as high returns on capital and even higher cash flows.
- Yet that's not what we have here. A sharp rise in receivables and inventories has stunted free cash flow over the past 12 months. On an absolute basis, FCF fell 80% last year. This makes sense if Under Armour is gearing up for massive growth. Otherwise ... uh oh.
Competitor and peer checkup
Normalized Net Income Growth (3 yrs.)
Source: Capital IQ, a division of Standard & Poor's. Data current as of Jan. 28.
Interestingly, it's another Rule Breakers pick -- lululemon athletica -- that gets the nod in this table. Fools aren't as enthusiastic, but I think they're wrong. Unlike Under Armour, lululemon has a history of keeping a tight rein on inventory and receivables. Cash flow has ballooned as a result.
I've never before sided with one rebel stock over another in one of these columns, so I guess you can call this a first. Lululemon enters my CAPS portfolio on the long side, as I join my Foolish colleague Rich Smith on the short side on Under Armour. Unexplained inventory bugaboos simply create too much risk at current prices.
Now it's your turn to weigh in. Do you like Under Armour right now? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.