Consumer Products

Why UBS Sees Massive Upside for Under Armour After Earnings

Under Armour Inc. (NYSE: UAA) reported its most recent quarterly results on Tuesday, and the report earned a fair amount of praise from analysts. While COVID-19 has been transformative for many companies, this sports apparel firm took the opportunity to get a leg up on the competition.

UBS was one of the more bullish analyst firms after the report. It upgraded Under Armour to a Buy rating from Neutral and raised its price target to $36 from $26, implying upside of 82.6% from the most recent closing price of $19.72.

Overall, the firm believes Under Armour’s effort to improve its margins has progressed far ahead of what’s priced into the stock. The market thinks strong fourth and first quarter results were due to fiscal stimulus and an unusually benign promotional environment, with both likely reversing in 2022. UBS thinks Under Armour’s gains will be long-lasting and that margin expansion should drive a 94% increase in 2023 earnings compared with 2019.

UBS detailed in its report:

UAA’s 1Q21 gross margin increased ~370 bps y/y. While a favorable promotional environment contributed to the gain, we see 4 other drivers: 1) Supply chain efficiencies; 2) Improved quality of sale (e.g. fewer Off-Price channel sales); 3) Mix shifts (to DTC and Asia); and 4) Better inventory management. These more than offset increased freight costs. The important point is we think these drivers will continue to push UAA’s GM% higher and this makes UAA a good stock to own post-pandemic. We like stocks that have self-help stories which will cause EPS to surprise after the reopening-driven spending surge plays out and we think UAA fits this theme.

At the same time, better margins are the main reason UBS is updating its estimates going forward. The firm raised its 2021, 2022 and 2023 estimates by 21%, 36% and 66%, respectively.

Excluding Wednesday’s move, Under Armour stock had outperformed the broad markets with a gain of about 39% year to date. In the past 52 weeks, the share price was closer to 146% higher.

Under Armour stock traded up about 8% Wednesday to $21.30, in a 52-week range of $6.37 to $21.59. The consensus price target is $15.75.