Stocks for newborns: Under Armour the next Nike?
The maker of performance apparel knows what it takes to succeed.
One in a special Top Stocks series on buying stocks for newborns.
If you could buy your newborn a stock like Nike (NKE), which in its first decade of trading returned nearly 600% and by today -- more than three decades later -- has returned nearly 15,500%, wouldn't you?
Under Armour (UA), which has a lot in common with Nike in its early days, also has the potential to be a stellar long-term performer.
The sports apparel and footwear company was founded in 1996 by former University of Maryland football player Kevin Plank. The then-22-year-old struggled to keep the company afloat until his fortunes began to turn in 1999. The company went public in late 2005, and revenue has grown from $17,000 in 1996 to nearly $1.5 billion in 2011.
Under Armour started by making athletic performance clothing using lighter-weight but tough fabric that draws sweat away from the body, keeping athletes cool. Since its inception, the company hasn't stopped innovating.
Today, the company makes clothing, shoes and accessories for men, women and kids, as well as green products. Athletes love the clothing and wear it proudly. The brand commands a loyalty that many established brands could only wish for. Its products are usually sold in retail stores like Dick's Sporting Goods (DKS), but it also has 80 outlet locations and five specialty stores, as of the end of 2011.
Last year was the Baltimore, Md., company's seventh consecutive year of revenue growth in public record. Its first-quarter results, reported last week, once again beat analyst expectations. Profit in the quarter rose 22% as sales jumped 23%, boosted by growth in all segments. The first quarter was also the company's eighth consecutive quarter of revenue growth in excess of 20%.
With so much growth and the recent stock run-up -- year to date it's up nearly 35% -- is there any reason to hope for more, especially considering the high valuation?
The short answer is yes. CEO Plank is not resting. Under Armour continues to innovate and introduce products based on new technologies, without compromising on design. In the past quarter, sales were boosted by the company's new ColdBlack, a fabric that makes dark colors act like light ones and protects the skin from sun damage.
Plank also realized, perhaps by witnessing the success of Lululemon Athletica (LULU), the potential of the women's market. The Armour Bra, for one, is another product that helped drive sales last quarter. Under Armour may not yet have a yoga line, but its appeal among women is growing, with the help of strong marketing campaigns.
The company is also increasing its footwear segment. While the much bigger Nike is often mentioned as competitor, Under Armour is still mostly an apparel maker, with footwear bringing in only 16% of revenue last quarter. But this is yet another segment that promises growth.
Growth can come from geographical expansion as well. The company's products are available in more than 80 countries, but in the first quarter, North American sales made up 94% of revenue. Indeed, earlier this month Under Armour named Adidas executive Karl-Heinz Maurath as president of its international division. His new role will include driving international growth, strategic expansions and overseeing Under Armour's international business in Europe, Asia and the Americas.
What the bears are saying
Not everything is perfect, however, and investors have raised a few objections.
First, the inventory problems. Last year, inventory grew faster than revenue, which scared investors. This quarter, the inventory picture was finally more favorable.
Bears also point out the competition, especially from lower-priced store brands. But that is an issue for every higher-tiered brand. The trick, which Under Armour seems to have mastered, is to make the brand attractive, unique and cool enough that customers are willing to pay up. Also, the company has managed to sign several high-profile athletes, including New England Patriots quarterback Tom Brady. Plank isn't shy about his plans to unseat Nike.
Also, the stock trades at considerably high trailing (50) and forward (31) multiples. But for a high-growth stock, investors often have to pay up. Should I remind you of Amazon (AMZN) and its ridiculous valuations?
Under Armour may not continue to grow at current rates, but it certainly will continue to grow. In the past few days its stock has dipped slightly, allowing for an entry point.
Plank, now a billionaire, still holds 21.3% of the company and 73.1% of the voting shares. He has never given up, not when times were tough at the beginning and certainly not now. While the old guard, such as Nike and Adidas, has claimed those consumers who grew up in the 1980s, Plank says he wants to capture the young generation.
If he succeeds, you will not only have made your newborn a wad of money but also taught him or her a great lesson in perseverance and business.
More from the series
Copyright © 2014 Microsoft. All rights reserved.
Remy Cointreau says it was 'adversely affected' by China's anti-extravagance policy.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.