Understanding Under Armour's underwhelming outperformance

By Bobby Raines,

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Understanding Under Armour's underwhelming outperformance

Bobby Raines 11/04/2013

Last week, I talked about a stock that went up sharply despite the company missing earnings estimates . This week, we're looking at companies that beat earnings estimates, but whose stock fell.

Athletic apparel maker Under Armour ( UA ) reported third-quarter earnings of 68 cents per share on $723.1 million in revenue on Oct. 24. Analysts had expected the company to earn 66 cents per share on $710.3 million in sales.

That outperformance was the good news. Unfortunately for Under Armour the news didn't stop there. Margins contracted to 48.4% from 48.7%. The decline in margins was likely to due to the company reporting its strongest sales growth in footwear, which has been a lower-margin business than some of the company's other lines.

Adding to pessimism about the future, the company raised its full-year revenue expectation to $2.26 billion, from a prior target of $2.23 billion to $2.25 billion. Analysts had already been predicting a $2.26 billion sales figure, so the increase merely brought the company in line with estimates, which seemed like a disappointment after the company's revenues exceeded expectations for the third quarter.

The company's CFO, Brad Dickerson, also said on the company's conference call that its early expectations for revenue and earnings for 2014 were below the low-end of its long-term growth target of 20% to 25%.

The combination of those factors was enough for the stock to fall. Not only that, but 14 of the 27 analysts who cover the stock have lowered their estimates for the December quarter recently.

It's hard to be too hard on a company that is still growing a quickly as Under Armour, but it seems like some retrenchment in how investors think about the stock is in order. Analysts expect the company's mix of sales to remain weighted toward footwear more than it has been, meaning the third-quarter's tighter margins are likely to persist for a while.

This isn't a reason to be super-negative about UA. Almost all companies experience slower growth and a different mix of product sales as they grow and mature. Even after its post-earnings decline though, the stock is still trading with a P/E ratio of 57.55, which seems high for a company whose growth is starting to slow.

Image courtesy of stockcharts.com

I don't see a lot of reason for the stock to move much higher in the near term. Traders could consider an 87.50/90 bear-call credit spread for a 35-cent credit. That's good for a 16.28% return, or 110.03% on an annualized basis. This position will return a full profit so long as the stock is below $87.50 at December expiration, giving this position 7.7% downside protection.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing Options
Referenced Stocks: UA

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