Morgan Stanley raised its rating on Under Armour to “Overweight” from “Equal Weight” due to the stock’s pullback in recent months and the company’s opportunity to “outperform peers” as a result of the combination of lower relative supply chain risk, stronger relative China performance, favorable channel checks, and likely conservative 2022 guidance.
The investment firm also raised its price target on Under Armour to $24 from $23. In afternoon trading, shares of Under Armour were up 50 cents, or 2.6 percent, to $19.58.
In a note issued Wednesday morning, analyst Kimberly Greenberger noted that shares of Under Armour had declined 10 percent year-to-date and 25 percent since Under Armour’s November earnings report. As a result, the stock’s P/E valuation is “well below” pre-pandemic levels and appears “cheap against peers with similar or inferior growth trajectories.”
Greenberger wrote, “In our view, current trading levels suggest the market 1) may have unfairly-penalized UAA’s stock for holiday weakness in specialty retail without considering its differentiated model and product exposure, and 2) may not recognize the opportunity for positive 2022 EPS revisions, which we think is unique in the soft lines space. Taken together, we think potential 1H22 outperformance versus peers could be a catalyst for the stock.”
Morgan Stanley believes Under Armour may outperform peers because its higher mix of apparel (65 percent of revenues) and more diversified sourcing presents a lower supply chain risk.
Greenberger said apparel is likely to move quicker to normalized inventory levels versus footwear in part because the category has lower labor needs and more dormitory capacity for factory workers to bring back production following disruptions due to the pandemic. Apparel production is also less concentrated in Southern Vietnam, where the pandemic-related shutdowns have been most prevalent. Finally, apparel facilities are more often vertically integrated, enabling faster production resumption.
The analyst wrote, “As such, inventory and revenue risk is concentrated in 4Q21 for UAA compared to footwear peers in 1Q22.”
Greenberger also feels Under Armour will be less disrupted by the broader weakness in China because the brand has less overall exposure to the region than most peers. She further said that unlike many of its peers, Under Armour did not release a statement regarding its stance on sourcing from the Xinjiang region.
Reports arrived in March 2021 that China was calling on boycotts for Western brands, including Nike and Adidas, over comments on alleged abuses in the cotton-growing Xinjiang region of Mainland China. Some market observers wonder if Western brands continue to be impacted.
Greenberger added, “As such, it’s possible UAA shows better relative topline trends in China in 1H22, which may make the stock a safe-haven within the broader sportswear group.”
The analyst noted that Morgan Stanley’s January sporting goods industry channel checks were “markedly positive” for Under Armour versus recent checks. She said, “This gives us confidence that UAA’s North America turnaround is working and international perception is improving, which could support higher revenue growth compared to pre-COVID trends.”
Finally, Greenberger said UA’s initial guidance for 2022 was likely conservative because guidance had been conservative in the past, and the stock had been rewarded for upside EPS revisions. She noted Under Armour’s quarterly EPS had more than doubled Wall Street’s expectations for five consecutive quarters, and management had raised full-year guidance for four consecutive quarters. Greenberger also said, “While we acknowledge this is a well-understood dynamic in this stock, we think it is under-appreciated at these price levels, as it represents a unique opportunity.”
Photo courtesy UA
