UA Stock: Here’s Why the Bears Are Wrong on Under Armour Inc

UA StockHuge Catalyst for Under Armour Inc

Boy, were the bears ever wrong on Under Armour Inc (NYSE:UA) stock. Just a few weeks ago, UA stock fell 5.1% in a single day, the largest daily drop for the stock in about two months.

A couple of news headlines lead to this decline…

First, Under Armour-endorsed golf star Jordan Spieth saw his lead vanish after he collapsed in the late rounds of the 2016 Masters. I’m sure more than a few people had second thoughts about picking up a pair of his UA golf shoes.

Next, Morgan Stanley analyst Jay Sole issued a report noting that his channel checks revealed weakening demand for Under Armour’s women’s line and soft sales in the company’s footwear business. Sole added that both of these factors would likely lead to a quarterly sales miss. (Source: “Under Armour’s Problems Are Far More Serious Than Spieth: Morgan Stanley Is Worried About What New SportScan Data Shows,” Benzinga, April 11, 2016.)

Sole also cited data from research firm SportScan, which showed that sales of wholesale apparel in the current quarter fell by two percent from last year. (Source: Ibid.) What made this troubling was that SportScan also said that sales fell by the same amount in the previous quarter.

But on Thursday, UA proved the bears wrong. UA stock rallied about seven percent after the company announced that it surpassed analyst expectations for first-quarter sales and earnings.

Under Armour said that total sales increased by a very impressive 30% over the previous year to $1.05 billion. Analysts were expecting sales of $1.02 billion. On the earnings front, Under Armour posted an increase of 64% to $19.0 million, or $0.04 per share, when analysts were expecting $0.02 per share.

Under Armour even upped its guidance for the rest of the year. Investors can now expect the company to post $5.0 billion in sales, which would be a 26% increase over 2015.

Under Armour can thank one catalyst in particular for the blowout quarter and this catalyst should help drive UA stock higher. What is this all-important catalyst? Stephen Curry.

Under Armour signed Curry about two years ago to a contract worth close to $4.0 million a year, which was considered a steal. Since that time, Curry’s popularity has skyrocketed. He’s emerged as one of the best players—if not the best player—in the league and is being described as a once-in-a-generation talent.

This season, Curry’s Golden State Warriors started off the season with 24 straight wins and the team just broke the record for the most wins in a season with 73. The hype around Curry has never been higher. That’s great news for Under Armour because fans will see him wearing his signature line of shoes.

Because of the “Curry” shoe, Under Armour’s footwear business is taking off and the division was the biggest source of growth in the first quarter. Footwear sales jumped by 64% over the previous year, from $161 million to $264 million. Under Armour CEO Kevin Plank said much of that growth was driven by the “remarkable success” of the Curry line of shoes. (Source: “Under Armour Sales Jump 30% As Stephen Curry Shoes Prove A Slam Dunk,” Forbes, April 21, 2016.)

The “Curry 2” shoe has been the bestselling basketball shoe after Nike Inc’s (NYSE:NKE) “Jordan” shoes. (Source: “Under Armour earnings: ‘Curry… Curry… Curry… Curry’,” Yahoo! Finance, April 21, 2016.) Under Armour has struck gold here with the Curry contract. The Curry line of shoes is helping to boost the company’s bottom line and that could lead to more big-name signings in the future.

On a bullish note, Morgan Stanley’s Sole said that if Curry’s popularity doesn’t waver over the next few seasons, Under Armour could be worth $28.2 billion. (Source: “MORGAN STANLEY: Stephen Curry could be worth $14 billion to Under Armour,” Yahoo! Finance, March 3, 2016.) That’s about  41% more than its current valuation of approximately $20.0 billion.

The Bottom Line on UA Stock

With a forward price-to-earnings ratio of 57.44, UA stock might be a bit too expensive for some investors. With a ratio that high, there is little room for error from Under Armour. But with the company riding the popularity of Stephen Curry, UA stock should be able to meet or even beat expectations.