In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
In round 1 (and round 2) of Stock Madness 2007, I promised a financial analysis of Under Armour
It's a well-known fact that Under Armour is growing rapidly, having increased revenues at an average rate of 55% over the past three years. Perhaps more impressive, however, is how Under Armour has been able to bring those revenues to the bottom line -- net income has increased at an average three-year rate of 89%.
Beyond that, UA has three major highlights in its financial statements:
- Solid cash/debt ratio
- Expanding margins
- Efficient operations
Let's take a look at each of these in greater detail.
Cash/debt: Unlike Oakley's
(NYSE:OO)debt-laden attempt to take onNike (NYSE:NKE)back in the mid-1990s, UA presently boasts $37 in cash for every $1 of long-term debt on its balance sheet. Back in 1997, Oakley had $7 of debt for every $1 in cash.
- Margins: If Nike and Adidas were taking huge chunks of UA's business, you would expect lower prices from UA and, therefore, shrinking margins. But that hasn't been the case. In fact, UA's operating margin expanded from 12.8% in 2005 to 13.6% this past year.
- Operations: For a young company, UA is remarkably efficient in turning its products into cash. How can you tell? Check out its cash conversion cycle, which currently stands at 111.2 days. This means that, on average, UA creates a product, puts it in a store, and gets cash for it in just 111 days. As with any ratio, the number itself is meaningless unless compared to competitors -- Nike's five-year average CCC is around 112 days, and Adidas' is 119 days. This will be a critical ratio to watch for UA shareholders, but the company is already off to a great start.
Add these financials to surging and edgy apparel and footwear line-ups with lots of room to grow, and you have yourself a recipe for strong returns.
Do you think Under Armour deserves a spot in the Stock Madness Final Four? If so, simply click here and vote it "outperform" on Motley Fool CAPS.
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