(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Under Armour, Inc.'s (UAA) stock has already fallen by 24% from its 2018 highs but now the stock appears poised to drop by another 12% from its current price of around $18.25 based on technical analysis. The bearish technical charts come ahead of what analysts expect to be a weak third quarter. (For more, see also: Under Armour May Drop 10% on Weaker Results.)
The shares of the athletic apparel maker are not even cheap at current levels. Under Armour‘s stock is trading at a valuation which is well above competitors such as Nike Inc.'s (NKE) or Lululemon Athletica Inc. (LULU). (For more, see also: Under Armour's 30% Stock Rebound May Fizzle.)
Breaking Technical Support
The technical chart shows that the stock has been trending lower since peaking in June. The stock is now trading below technical support of $18.70. Additionally, the downtrend and support create a bearish technical pattern called a descending triangle. Should the stock stay below that level of support, it is likely to fall further towards its next support level around $16. The relative strength index is also trending lower, and that suggests that momentum is leaving the stock.
Analysts are looking for the company to report weak third-quarter results. They are forecasting earnings to decline by more than 43% to $0.12 per share. They are looking for revenue to be up by 1% to $1.42 billion.
The forecasts for the balance of 2018 aren’t much better because analysts see earnings falling by about 12% to $0.17 per share. That is down from prior estimates in January when analysts were looking for a profit of $0.23.
Making things more difficult is that the shares are trading at a 2019 PE ratio of 58. That is almost double Nike’s one-year forward PE ratio of 24. Even Lululemon, whose shares have more than doubled this year due to strong earnings and revenue growth, has a PE ratio of 33. The stock is also on the upper end of its historical valuation since 2015 between 35 and 70.
With earnings around the corner, investors will need to see better than expected results and strong forward guidance to turn the negative trends. It is likely to mean that until investors have something to be more excited about, the stock may continue to struggle.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.