Analyst Oliver Chen upped his rating on Under Armour’s stock [$UAA] to Outperform from Market Perform, and raised his price target to $23 from $17, asserting that “consensus estimates are far too conservative” through 2023.
The company has been licking its wounds since last summer when its founder Kevin Plank was bounced from the board after a federal probe disclosed that its been responding to requests for documents from both the SEC and DOJ since July of 2017 regarding “certain of the company’s accounting practices and related disclosures.”
Chen thinks that a continuing rebound in brand momentum will fuel sales above the average analyst estimate, leading to higher profits. He predicts an EPS of 21 cents in fiscal 2021 and 42 cents in fiscal 2022, far above the Street’s consensus of 13 cents and 29 cents, respectively.
Beyond this year, Chen intimated that analysts are planning on flat margins and revenue some 3% below 2019 levels, despite the fact that Under Armour is benefitting from improved brand positioning, better inventory management, and restructuring initiatives that could buttress cost savings beyond what the company has targeted.
Chen is optimistic about Under Armour’s “refining and elevating” of its products, which “appears to be resonating with consumers and retail partners.” While other analysts are apprehensive that the company can meet its goals, Chen is confident that it’s on the right track.
“We see the potential for the business to reach a 10% EBIT margin, 25% return on invested capital and $400 million in annualized free cash flow which suggests the stock is undervalued on both a relative and absolute basis,” he writes. Furthermore, he said the company’s international expansion means that its North American business doesn’t necessarily need to bounce back to 2019 levels to meet consensus estimates.
Chen isn’t the only analyst getting rosy on the stock: Deutsche Bank [$DB] upgraded Under Armour last week, referencing similar conviction in rising margins and better cost controls. Under Armour is up 2.8%, at $19.17. Shares have climbed more than 8% since the start of 2020, but dipped 14% in the past 12 months.