Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
Shares of Under Armour (NYSE:UAA) bucked the broad market trend on Monday, gaining 0.5% (the S&P 500 was down 0.2%), following a report published this morning in which broker FBR & Co. raised its price target $90 from $86.
Only last week, FBR raised its price for Under Armour from $83 to $86 based on the emerging strength of its footwear line. Indeed, the broker is now in the second of four weeks of "UA Madness," in which it publishes a weekly consumer survey to examine UA's brand power and consumer acceptance. This week's topic is Latin American growth and, specifically, Brazil, and FBR concludes [their emphasis]:
We believe Latin American growth will significantly drive upside to revenue expectations over the next several years and estimate Latin American revenue could reach ~$400M by 2018 (~5% total UA revenue), contributing ~200–300 bps to revenue growth in 2016–2018. We estimate every additional 0.2% in Latin American share that is gained adds at least +100 bps to revenue growth. We see the largest opportunity in Brazil: Our survey work indicates solid brand recognition and preference, given it has only been active in the market for about a year. (We estimate Brazil could contribute at least 1.4 points to revenue growth by 2018.) Our surveys and estimates give us confidence in UA driving upside to revenue expectations over the next several years via international, as well as solid U.S. apparel and footwear execution. ... Given increased visibility in UA's international growth, we raise our price target to $90 from $86 (4.0x P/S applied to 2016 sales, versus 3.8x previously).
In deriving its price target for the stock, FBR's analysts assigned a super-premium multiple to UA's estimated 2016 revenues relative to its historical and peer multiple averages (4.0 times, compared with 2.2 and 2.6 times, respectively.) I'm certain UA deserves some sort of premium, but I'm not convinced it ought to be that large; unfortunately, FBR's report doesn't provide greater analytical clarity regarding how they came up with that figure.
I expect Under Armour's operating results to go from strength to strength; however, at 57 times the consensus estimate for 2016 earnings per share, the current valuation looks likely to act as a brake on further stock price gains. As I concluded last week, "Anyone buying the shares today must be prepared to hold them for a long time (five years, at minimum)."