Under protection (NYSE: UAA) (NYSE: UA) has put investors in a volatile race in recent years. Shares of the sportswear and footwear company have risen nearly 50% in the past 12 months, but are still down more than 50% from three years ago.
Is this recent rally a sign that the company has finally taken the leap? And is the stock a compelling buy today? Let’s find out.
A huge market opportunity
Despite years of rapid expansion, Under Armor still has long avenues for growth to come. In the $ 280 billion athletic footwear and apparel market, the company targets what it calls “target performers.” They are consumers concerned with maximizing their athletic and physical performance.
Under Armor estimates this market at $ 92 billion worldwide. This represents a significant long-term growth opportunity for a company that generated $ 5.2 billion in revenue over the past year.
Discover the latest Under protection earnings call transcript.
Refocus on your customer’s heart
Under Armor believes their brand resonates well with die-hard fitness enthusiasts. To strengthen this link, it is repositioning itself as a “human performance company”. After trying to lie down in the athleisure segment with moderate success, Under Armor is reducing its product line and focusing more on items that it believes give its customers a competitive advantage.
Adapt to changing retail trends
In addition, Under Armor is reducing its reliance on wholesale channel partners and expanding its direct-to-consumer sales channels, such as its e-commerce websites. This is in part out of necessity, as the recent bankruptcies of sportswear retailers such as Sports Authority negatively impacted Under Armor’s results.
However, it also gives Under Armor a more direct connection with its customers, which can help it gain more control over its branding image. It should also give the company more data that it can use to better target its promotions, thus increasing the return on its advertising investments.
Interesting international expansion prospects
In the future, much of Under Armor’s growth will likely come from international markets. The rapid growth of the middle class and the corresponding increase in consumer purchasing power in large emerging markets such as China are fueling demand for better quality clothing. In turn, Under Armor expects to increase its international revenues by up to 19% per year over the next half decade.
Yet while its prospects for international expansion appear intriguing, Under Armor’s growth remains sluggish in its primary North American market. The company’s traditional retail partners are struggling as sales migrate to online channels.
While this benefits Under Armor’s e-commerce business, it hurts its physical sales, which make up a larger percentage of its business. In turn, Under Armor expects to see only single-digit sales growth in North America over the next five years.
A less than ideal price
Despite these challenges, Under Armor shares are trading at a premium price. The stock is currently changing hands at more than 60 times Wall Street’s earnings estimates for 2019. That’s a bit rich – even for a company that is expected to grow profits by 40% a year over the next five years – especially since Under Armor has a history of emission overly optimistic financial goals.
To account for this, investors wishing to profit from the growth of Under Armor might be better served by a options strategy.
An alternative approach based on options
Rather than buying the stock today – or, conversely, waiting and hoping for the opportunity to buy stocks at a more attractive valuation – investors may consider sale of put options. With this options strategy, you will receive a premium (money received up front) to enter into a contract to purchase 100 Under Armor shares at a specified time and price.
For example, the January 2020 SAU $ 15 put options are currently trading at around $ 1.08 per share. If the Class A shares of Under Armor (ticker UAA) trade at or above $ 15 on the option contract expiration date of January 17, 2020, the put options will expire worthless. And the $ 108 you will receive as a bonus ($ 1.08 per share times 100 shares) will equal a gain of more than 7% on the $ 1,500 you put at risk ($ 15 per share times 100 shares).
If the Under Armor Class A shares are trading for less than $ 15 on expiration, you will be required to buy 100 shares at an adjusted price of around $ 13.92 per share ($ 15 minus the 1. $ 08 per share you received as a bonus), which is about 33% less than Under Armor’s price of $ 20.65 today. It is also important to note that you will buy the stock in January 2020, after it has had time to increase its profits in the coming year. So, in effect, you will be buying stocks at a significantly better valuation than is possible by simply buying the stock today.
In addition, between the time you sell the puts and the expiration date, you will have the option of redeeming the puts or carrying them over to others. strike price and / or expiration dates. While Under Armor might not be a compelling buy at current prices, this options-based approach gives you several ways to make a profit in the coming year.
Finally, the reason I chose the $ 15 strike price in this example is that at this level Under Armor would trade at around 45 times profit, which would place its PEG ratio closer to 1 – a level that I find attractive for high quality growth companies. More importantly, I would be happy to buy shares at this price.
If you also wish, this option strategy may be something to consider.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.