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What The Ray Rice Video Means For Under Armour Inc.

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What The Ray Rice Video Means For Under Armour Inc.

The release of a video showing the Baltimore Ravens' Ray Rice punching his then-fiancée (now wife) is unlikely to deliver a knockout to Under Armour Inc.'s (NYSE: UA) bottom line, but it will certainly attract scrutiny.

Under Armour is proudly based in Baltimore, Maryland, and the Ravens have long been the apparel-maker's marquee NFL franchise. While Nike, Inc. (NYSE: NKE) is the official apparel provider of the NFL, the Ravens practice in the Under Armour Performance Center, and the company has endorsed prominent Ravens, including Ray Lewis, Haloti Ngata and Anquan Boldin in the past.

It's important to note that Under Armour has no direct affiliation with Rice. Because the Ravens are synonymous with the brand, though, consumers could view this as guilt by association.

Very Bad Timing

Unfortunately, this video comes at a very bad time for Under Armour.

The company makes about 30 percent of its $3 billion in annual sales from women, and it just added model Gisele Bundchen to its stable of pitchwomen that includes ballerina Misty Copeland, skier Lindsey Vonn and surfer Brianna Cope. Shares of Under Armour jumped nearly four percent to an all-time high after the deal with Bundchen was announced, pushing the stock's market capitalization past $15 billion.
This is music to the ears of Tom Brady. The New England Patriots star quarterback (and Gisele's husband) took an equity stake in Under Armour as part of his 2010 endorsement deal with the company.

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Additionally, the Bundchen deal comes roughly a week after basketball superstar Kevin Durant turned down Under Armour's 10-year, $285 million contract offer that included a small equity stake in the company. Durant opted to return to Nike for a reported $350 million over the next decade.

Under Armour's basketball shoe sales were roughly $300 million last year, and Durant alone generated $175 million of retail sales for Nike.

The Investing Angle

Truth be told, even if the Ray Rice video has no impact on Under Armour, the company's shares look overvalued. UA currently trades at roughly 77 times projected 2014 earnings, and total debt continues to increase.

Short sellers have also taken notice. Short interest is now 7.2 percent of outstanding shares, compared to just 1.0 percent for Nike.

CEO Kevin Plank has done a remarkable job of taking the UA brand from startup to retail powerhouse, but that doesn't mean the company is perfect. It may be time to distance itself from the Charm City's NFL franchise.

Disclosure: At the time of this writing, Mike Lingenheld had no position in the equities mentioned in this report.

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