UA Investors Enjoy These Pros, Frown upon These Cons

Key upsides

Let’s discuss the major pros and cons of holding Under Armour’s (UA) stock. Among Under Armour’s primary strengths is its strong business model, which shows substantial potential for further growth.

This growth can be seen in multiple areas, including the company’s expansion into international markets, the growth of its footwear business, and the further development of its women’s segment. All these areas currently make up small proportions of UA’s sales.

UA Investors Enjoy These Pros, Frown upon These Cons

The company was recently upgraded by Piper Jaffray, which cited the improved traction of its footwear and women’s segments as key reasons for the upgrade. Read the next article to know more about Wall Street’s recommendations for the company.

UA’s top line is expected to remain firm over the next two years. Wall Street expects its sales to rise 24% in 2016 and another 25% in 2017. In comparison, Nike’s (NKE) revenue growth is expected to be ~8% and ~9%, respectively, in the next two years.

As a company with strong growth prospects, UA is included in many ETFs that invest in companies with growth slants. UA makes up 0.26% of the iShares Russell Mid-Cap Growth ETF (IWP).

Key downsides

Counter to the above-mentioned strengths are some of Under Armour’s weaknesses, such as its rising debt levels, its deteriorating interest cover, and its generally high valuation levels. You can read more about UA’s valuations in Part Nine of this series.

Under Armour’s total debt stood at ~$1 billion at the end of 2Q16, registering a 42% rise compared to 2Q15. The company’s debt-to-equity ratio now stands at 57%, compared to its level of below 20% leading up to 2014.

The rise in UA’s debt level is a result of its acquisition of new fitness apps, its opening of a new headquarters for its Connected Fitness division, and its opening of a new manufacturing facility to support 3D printing technology. UA’s capital expenditure-to-sales ratio has risen from ~5% at the end of 2014 to ~15% at the end of 2Q16.

Despite a rise in its debt-to-equity ratio, UA is still in a better position than its peers Columbia Sportswear (COLM) and VF Corporation (VFC). The two companies reported debt-to-equity ratios of 112% and 60%, respectively, in their last reported quarters.

Lululemon Athletica (LULU), on the other hand, is debt free. Nike (NKE) had a debt-to-equity ratio of ~16% in its last reported quarter.