KeyBanc Steps To The Sidelines On Under Armour, Notes Shares Already Trading At Premium Valuations - Under Armour (NYSE:UA)

In a report published Friday, KeyBanc Capital Markets analyst Edward Yruma upgraded shares of Under Armour Inc UA to Sector Weight from Underweight with no assigned price target versus a previous price target (established on July 9) of $53 following the company's second quarter results.

According to Yruma, Under Armour is "one of the best" growth companies under his coverage, as it continues to innovate in apparel functionality and casual offerings. The analyst noted that the apparel category has grown at a 20 percent plus rate for the past 23 consecutive quarters, with the second quarter's growth coming in at 23 percent.

Apparel Segment

Yruma stated that Under Armour's apparel segment could continue growing at a "particularly impressive" 15 percent plus level for the foreseeable future. In addition, the company's continued expansion into connected fitness could prove to be a long-term "differentiator" as the company is "moving early" now by investing "heavily" to drive long-term growth.

Roster Of Marquee Athletes

Yruma also commented that Under Armour has done an "outstanding" job in building its roster of marquee athletes. The analyst singled out the footwear category that gained more than 40 percent in the quarter. Stephen Curry led the Golden State Warriors to the NBA championship and Under Armour's relationship with the all-star served as proof it can "strike the balance of a marquee athlete, compelling design and scarcity that underpins some of the most successful basketball shoe families."

On The Downside

However, Yruma sounded some warning bells and stated that Under Armour has one of the highest growth rates within his coverage (with 2014 sales rising 32 percent), and an inability to scale the business even further could negatively impact the company and its long-term strategy. In addition, the international segment is a major focus of the company's long-term growth but still remains a "work in progress."

Now And Beyond

Bottom line, Yruma pointed out that shares are trading at a "pricey" 89.1x 2015 P/E multiple versus the 27.9x multiple for the brand's peer group. Shares are also trading at a 2015 EV/EBITDA of 42.8x compared to a 13.4x multiple for the peer group.

"We would still prefer to be tactical on a pullback, but strong companies should carry premium valuations, and we see no reason why this should be different," Yruma concluded.

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