To be sure, long-term Under Armour (UAA -2.34%) investors must be feeling pretty good right about right now. Even after an 8% drop over the past month amid a broader market pullback, Under Armour stock has still skyrocketed nearly 53% so far in 2014. That absolutely crushes the S&P 500's respectable 7.4% total return over the same period:
And this rise is nothing new. In fact, those who bought Under Armour five years ago have seen their investment rise more than eightfold! But after such impressive gains, and with Under Armour's next quarterly report coming up later this month, is it time to buy Under Armour stock now?
A pricey stock ...
Even as longtime shareholder myself, I'll admit at first it's tempting to say "No."
After all, shares trade at a lofty 87 times trailing 12-month earnings, and 55 times next year's estimates. For perspective, Under Armour's most recent guidance calls for 2014 revenue to grow between 28% and 29% (to a range of $2.98 billion to $3.0 billion), while operating income is expected to jump 29% to 30% (to a range of $343 million to $345 million).
Analysts, on average, see Under Armour growing its bottom line at an annualized rate of "only" 30% over the next five years. That gives it a price-to-earnings growth ratio of roughly 2.91, so -- even given Under Armour's solid growth -- prospective buyers should know they're paying a hefty premium for Under Armour stock today. As such, don't be surprised if broader market fluctuations and even minor quarterly disappointments result in significant volatility from here.
... with incredible growth potential
At the same time, however, there are no guarantees that premium will disappear anytime in the near future.
First, given Under Armour's persistent habit of underpromising and overdelivering on the market's expectations, it's no surprise the stock seldom looks cheap. Most recently, Under Armour beat expectations and raised guidance, capping its 17th consecutive quarter of achieving at least 20% top-line growth. That streak isn't expected to end anytime soon and represents exactly the kind of steady long-term growth Foolish investors absolutely love to see.
And though you might be concerned net income was flat over the same period, that was primarily because of Under Armour's planned shift in the timing of marketing and "product innovation" expenses as it works to aggressively build its brand. That also includes costs to grow Under Armour's high-margin direct-to-consumer business, sales from which rose 38% last quarter and represented 31% of total revenue.
What's more, remember Under Armour is only now beginning to ramp its international expansion. Last quarter, Under Armour's international revenue doubled year over year and still comprised just 8.5% of its total sales of $609.6 million. By comparison, of Nike's (NKE -0.74%) total $7.982 billion in revenue last quarter -- which itself represented solid 15% year-over-year growth for the apparel and shoe behemoth -- nearly 56% came from international consumers.
A global footwear titan in the making
Within that, note that more than $4.7 billion of Nike's brand revenue came from footwear alone. By contrast, revenue from Under Armour's young footwear line grew 34% last quarter to $109.5 million. That's not entirely unsurprising, though, as U.S. consumers largely still view Under Armour not as a footwear titan, but instead as an apparel-centric brand. Perhaps most encouraging, however, was that Under Armour CEO Kevin Plank later told investors their international retail stores are selling more footwear than they had anticipated. This bodes well for Under Armour's balanced sales mix and competitive prospects with Nike if international consumers are introduced to the brand as both an apparel and footwear play.
In any case, for now it makes perfect sense for Under Armour to focus on taking market share by investing for sustained top-line growth. As those investments continue to bear fruit, Under Armour's bottom line will eventually follow suit and help it grow into its premium valuation. As a result, for patient investors with a long-term mindset, that's why I think now's a great time to buy Under Armour stock.
