2 Convincing Reasons Baird Thinks You Should Stick With Under Armour

Despite weaker fundamentals, Baird sticks with its Outperform rating on Under Armour Inc (NYSE: UA) (NYSE: UAA) as it feels the brand value remains in favor, and management has the will/fortitude to turn the ship.

Under Armour, the athletic footwear maker, issued a disappointing fourth-quarter report and 2017 outlook, limiting its near-term visibility.

Analyst's Commentary

“Positively, we think the current pain could prove a longer-term blessing, as UAA appears more focused and is pursuing Opex/Capex efficiencies which could enhance operating leverage when sales improve, support improved FCF, and drive a bottoming of ROIC in 2017,” analyst Jonathan Komp wrote in a note.

Komp noted that Under Armour’s issues were somewhat similar to the hiccups that stalled the growth of rival Nike Inc (NYSE: NKE) in the late 1990s. Nike also faced a steep downturn in the late-1990s only to come out as a much stronger company.

“[S]ince NKE's stock performance has directionally followed ROIC over time, we are hopeful that stable-to-improved ROIC for UAA in upcoming years can be a good indication for the stock,” Komp highlighted.

Investors always felt Nike as the whitespace opportunity for Under Armour. Komp said following the recent pullback, Under Armour shares currently command a market capitalization that is only about 10 percent of that of Nike, while Under Armour's trailing 12-month revenue and EBITDA is 14 percent/11 percent of Nike.

“The last time this occurred (relative market cap < relative sales/profit) was around the 2009 bottom for UAA,” Komp added.

Komp, who has a price target of $25 on Under Armour shares, feels the recent downturn is only a temporary disruption and not deterioration of brand fundamentals.

Shares of Under Armor closed Wednesday’s trading at $21.44. In the last one year, shares have dropped 75 percent.