Under Armour Downgraded: New Investments May Put A Damper On Earnings Growth

Although Under Armour Inc UA would likely generate robust revenue going forward, substantial investment to expand the business could weigh on earnings growth, Argus’s John Staszak said in a report. He downgraded the rating on the company from Buy to Hold.

Under Armour’s revenue growth in North America is expected to be driven by the company’s increased presence in department and specialty stores, higher sales of footwear and strength in the women’s and youth categories.

Staszak mentioned that merely 12 percent of Under Armour’s revenue was being generated overseas, offering the company good opportunities to boost sales at specialty stores outside North America.

Related Link: Stifel Says Under Armour And Adidas Gaining, But Nike Still Reigns Supreme

Business Expansion Could Weigh On Earnings

While revenue is likely to remain strong, any further expansion would require substantial business investment. This would increase the company’s debt and interest expense, and weigh on margins and earnings growth, Staszak stated.

The EPS estimates for FY16 and FY17 have been reduced from $0.60 to $0.56 and from $0.78 to $0.74, respectively. “Over the long term, we expect UA’s innovative product technology to attract more customers and to generate higher sales and margins,” the Argus report added.

The analyst commented that with Under Armour’s shares trading significantly higher than the “average for other apparel companies in our coverage group,” and with prospects of a slowdown in earnings growth in the near term, the stock valuation seemed high.

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