Most of us fans saw the BCS Championship Game as Auburn vs. Oregon or Cam Newton vs. LaMichael James. But as a stock trader, I couldnāt help but see it as a battle of great brands: Under Armour (Auburnās outfitter) vs. Nike (Oregonās). On the field, Auburn won. And on TV, Under Armour won, getting about $5.3 million in ad exposure from the championship broadcast. (Nike got $2 million less, according to CNBCās Darren Rovell.) And what about in the stock market? Letās take a look.
Under Armour has become a necessary piece of equipment for me as a hockey player. I honestly couldnāt play without it at this point. And every year instead of some awful sweater from The Gap they know I'll never wear, my relatives send me Under Armour. Iām outfitted from head to toe in the stuff when I play, the socks, compression shorts and long-sleeve compression shirt.
Under Armour was able to carve out a great niche in the athletic wear industry by coming to market with a distinct product; their main innovation was in the synthetic fabrics used in the compression moisture wick shirts and shorts they marketed to athletes. I remember as a kid wearing loose fitting t-shirts and boxer-briefs made from cotton under my hockey equipment. It was uncomfortable, and by the end of the first period I was soaking wet. Luckily today my equipment keeps me drier and is significantly lighter than it used to be.
Although it was founded in 1996, the companyās initial growth phase took place between 2002 and ā07. It did a magnificent job at focusing on a limited line of products and building brand awareness. It became a staple in every athleteās equipment bag and marvelously marketed itself by sponsoring top athletes in every major sport. It had marketed itself so well in fact, that āUnder Armourā today is used as a generic term for all athletic under garment equipment of the kind, the same way we use āKleenexā for tissues and āXeroxā for photo copy.
But like every other high growth apparel company in a new market, Under Armour ran into hurdles. Nike, Reebok, and a host of other companies came to market in the latter half of the decade with their own lines of very similar equipment. Under Armour would have to change tactics in order to continue its steady sales growth. The company was at a major crossroads, and then the global economic collapse took place.
Its stock price plummeted. Sales growth took a nose dive in ā08, due to consumersā unwillingness to spend on anything other than the essentials. When growth slows for the first time in a developing business like Under Armour, holders of the stock playing the momentum trade exit quickly. High stock prices compared to
earnings are a sign that the market is uncertain as to just how fast a company can grow after several excellent
quarters. But when expectations for that growth arenāt met, the stock will often trade down quickly. Under Armour dropped from a high of $73 in ā07 to a low of $11 in early ā09. Its EPS (Earnings Per Share) for ā07 came in at $1.05 while its EPS for ā09 was $.92. As you can see, huge stock value contraction took place while the fundamentals of the company remained strong.
The company kept going, however, expanding into footwear, casual wear, and accessories. And it has been extremely successful. Under Armourās brand is strong, and by positioning themselves at the top end of the market, they've maintained the athleteās trust in the quality of their gear. Take it from someone who hates to blow money on clothing: Iām willing to spend a few extra bucks to know my athletic equipment is top
Over the past year and a half, Under Armour has been able to regain its pace of growth. Its revenue and earnings are both accelerating at a nice clip, and institutional participation in the stock has been significant. Its earnings and sales multiples have both expanded again as well, as analysts have failed to account for the success of its new product lines.
Now letās take a look at the UA stock chart.
It shows great strength, trading above the 50- and 200-day moving averages, which are both moving higher. The apparel industry has shown great relative strength in comparison to the overall market, and Under Armour has led the way. The current bullish pennant-shaped pattern is a positive sign after a very strong run the past few quarters. If it holds, the pattern will signify further buying by intermediate and long term holders of the stock. And if the pennant breaks out to the positive on high volume, itās a sign of more good things to come.
I donāt believe Wall Street analysts have a good grasp on just how strong the Under Armour brand is, and how successful they will be at moving into other lines. As always for an apparel company at this stage of its growth, it will be important that Under Armour does not stray too far too fast from its core brand. Overextending itself and its product line is a large risk as compression undergarments, UAās bread and butter, become a smaller piece of sales and the overall story. The company needs to focus on constantly making the connection between its core and their future with the consumer.
The company is expected to report earnings on Jan. 28, which could be the catalyst for the next leg up in this stock. This is the phase at which a small company with a highly specialized product can become a large multinational apparel company with an expansive product line. And for those who donāt remember, thatās exactly what Nike did by expanding from shoes to everything from sunglasses to golf clubs.
-- Leigh Drogen is the founder of Surfview Capital and a leader in business development for Stocktwits.com. Any views expressed in this story are those of the author and not ThePostGame.com.