Wells Fargo Raises Under Armour (UA) to Outperform as Growth Seen as 'Intact'
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(Updated - October 10, 2016 10:16 AM EDT)
Wells Fargo upgraded Under Armour, Inc. (NYSE: UA) from Market Perform to Outperform with a price target of $44-$46. Analyst Tom Nikic thinks company's growth story is "intact" and he pointed out improving inventory levels. He also thinks North America distribution headwinds are peaking.
Nikic explained, "We are upgrading shares of UA to Outperform, as the noise from The Sports Authority’s (TSA) bankruptcy fades and distribution expansion could lead to a top-line reacceleration over the next 12-18 months (following an expected Q3 trough)."
The analyst continued, "Over the longer-term, the company is still in the early stages of growth, as industry bellwether Nike (NKE, Market Perform, $51.79) is 7x larger and Adidas is 4x larger – with UA possessing noteworthy opportunities to narrow the gap internationally and in their footwear/sportswear businesses. Notably, besides the company’s top-line growth opportunities, we also believe they are underearning on margins and below-the-line items. Thus, while valuation multiples remain industry-high (47x/20x FY17E EPS/EBITDA for the A shares and 41x/17x for the C shares), we believe UA is one of the strongest growth stories in our group today, and reaccelerating growth post-Q3 should make the valuation an easier pill to swallow."
Discussing distribution headwinds, the analyst said, "While TSA had become a significantly smaller piece of the UA pie over the years (3-4% of sales vs. a peak of 15% ten years ago), the loss of revenue in this key distribution channel should persist into early 2107 (UA still shipped to them partially into Q2). That said, we believe the puts/takes of distribution-related factors troughs in Q3 and turns favorable in early-2017, for the following reasons: 1) given the seasonality of the wholesale business, the lost TSA revenue is largest in Q3 (both in absolute dollars and as a percent of total sales), 2) TSA-slated product that’s still in UA’s supply chain can likely be cleared through the off-price channel (representing a partial recovery of sales), 3) UA is expected to begin shipping to 600 KSS doors shortly (we believe the first bit of revenue will begin to be recognized late in Q4) and 4) as the TSA drag rolls off in Q2/Q3 next year, we believe UA will also roll out to the other 600 KSS stores. Thus, we see a 'cushion' to sales growth in 2017, and potential for acceleration if the non-TSA/KSS part of the business holds steady. "
Shares of Under Armour, Inc. closed at $37.78 yesterday.
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