Nike, Underarmour

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Under Armour Inc. (UA) has been one of the major sports business success stories of recent years, a big-talking newcomer in the sports apparel market that has successfully established itself; its profit next year is on course to be more than the triple its 2007 net income.

But a compound annual growth rate of 34% since 2005 is a double-edged sword: yes, it reflects a fast-growing company, but it also can lead to an over-cooking of a stock’s price. That’s the view of JPMorgan Chase analyst Matthew Boss, who on Wednesday initiated coverage of Under Armor by slapping a sell rating on the stock, and setting a $45 a share price target, more than $5 below today’s price.

In a lengthy research note, the Boss outlined his view.

UA’s long-term growth potential is substantial as the largely North American brand (94% today) eyes global opportunity over time. Taking a step back, we believe UA is entering an intermediate growth period in its longer term global growth horizon (from high-growth = 28% trailing 5-year sales CAGR, to more moderate growth in FY13E of ~23.5%) with investment key today for the next phase of growth (International, Footwear, DTC). Although UA has numerous drivers in place near- term to sustain 20%-25% top line growth (NA dept stores, sporting goods), we see 2015 as the potential “sweet spot” for growth given a greater contribution from footwear (13% today w/ first clean slate in FY14), international presence (step-back before forward), and square footage growth opportunity at Outlets as leases (typically 5 year) come due.

In other words, growing pains.

Boss also started coverage of Nike Inc. (NKE), giving the company a Hold rating and a $100 price target, a touch above today’s $99 share price. He touts Nike’s best-in-class position in its category and also points favorably to its balance sheet:

With annual free cash flow generation of $6.6B for the next 3 years (9.1% yield), Nike’s balance sheet is fortress-like today. Nike’s...
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