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Under Armour Doesn't Cover the Spread

Brendan Mathews
July 28, 2006

Under Armour (Nasdaq: UARM  ) reported a solid second quarter. Compared to the previous year, revenue was up 63%, and earnings were up 33%. Earnings per share were $0.05, and analysts were only expecting $0.02. Yet the stock fell over $2 after results were released. According to Raymond James analyst Dan Wewer, the stock fell because "Under Armour did not generate the same magnitude of upside surprise as it has in past quarters." In other words, the company beat estimates, just not by enough.

This is a good illustration of the dangers of high expectations. For Under Armour, tremendous expectations are priced into the stock, and as a result the company needs to hit a home run every quarter or the stock will plummet. This quarter, the company beat analyst estimates, and the stock fell by a few dollars. Imagine how much the stock will fall if Under Armour misses expected earnings.

These expectations don't just apply to the short term. The consensus Wall Street estimates for revenue are approximately $400 million in 2006 and $500 million in 2007. Last year, the company recorded $281 million in revenue. That means the expectation is to deliver 40% revenue growth in 2006 and long-term earnings growth of over 22% annually. With a trailing P/E of 80, that expecta