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Under Armour’s growth doesn’t come cheap

Under Armour website

As the economy weakens and big-name companies miss targets and ratchet down expectations, it pays to be seen as one of the few remaining top-flight growth stocks.

Which explains the performance of the shares of clothing maker Under Armour, up nearly 11.5 per cent in the last two days even as the broader market is down about a percentage point.

The company reported earnings Tuesday morning by beating expectations and raising guidance. Earnings of 6 cents per share topped consensus of a nickel, and a $369.5-million (U.S.) profit topped expectations of $358-million. It also bumped up its full-year outlook for revenue and operating income and now forecasts growth of 24 per cent and 27 per cent, respectively.

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Under Armour gained 9 per cent on the news and built on those gains Wednesday, closing at $53.92 (U.S.); investors had no chance to get in on profit-taking.

The price of entry is now high, at a price-to-earnings ratio of 57 on the last 12 months' profits of less than $1 per share; the forward P/E is 42, per Standard & Poor's CapitalIQ. (By comparison, growth darling Lululemon Athletica Inc. has trailing and forward P/Es of about 41 and 33, respectively.)

Worth it? Analyst Sharon Zackfia of William Blair & Co. says so, reiterating an "outperform" rating after Tuesday's earnings. "We continue to believe Under Armour's valuation can be supported by the momentum of the business," she says, with "a potential positive wild card" being easier comparisons in the fourth quarter, since 2011's warm winter weather negatively affected sales of the company's ColdGear line.

A number of other analysts can't get past the valuation; there are 12 "buys" and 15 "holds" on the stock, according to Bloomberg. (One hardy analyst has a "sell.")

Kate McShane of Citigroup Global Markets Inc. says the shares have "already pric[ed] in substantial revenue growth." She has a "neutral" rating and a $51 price target.

Travis Williams of Stephens Inc. says the "valuation remains too rich for our blood, and we still think a better entry point awaits." He has a "neutral" rating and $44 price target.

And Christopher Svezia of Susquehanna Financial Group said he was "somewhat surprised at the magnitude" of Under Armour's gains on the earnings news because the increased guidance simply put the company in-line with the existing consensus. "Looking forward we see upside to both sales and earnings, but view that as priced in as shares approach all-time highs," he says. (He has a "neutral" rating with a $50 price target.)

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It all adds up to suggest investors – as they often do –have to pay up to get in on a company seen as a leader in growing its top and bottom lines.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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