Finally got an early post in so enjoy.

While I’ve had nothing but praise for the better part of two years for Under Armour, I thought that it was time I took a more critical look at Under Armor, and I’m glad that I did.

After taking a second look at Under Armour, I’m not exactly sure that it’s a stock I’m comfortable investing in. I’ve long thought that UA was going to be an incredible stock to buy and hold, but I did something that I’ve rarely done before with most other stocks, and looked into their financials.

Personally, it just didn’t sit well with me that UA opted to release Class C stocks instead of going for a 2-1 Split. This had the effect of diluting the number of UA shares on the market and caused the stock to drop 50% on Friday.

While uninformed Under Armour investors would have panicked, UA didn’t do anything to hurt their investors. The class C shares were distributed to the owners of Under Armour stock. UA calls this a stock dividend.

The problem I have with this is that it basically secures UA’s leadership a job for a long time. It also makes it vulnerable to a hostile take over. If they keep diluting their shares by releasing more and more Class C shares or split their stock 2-1, it will decrease the stock price immensely and allows investors to gobble up large portions of the stock.

Now I’m not scared of Under Armour going through a hostile takeover or anything, all this just made me question what UAs end game was, they must have had something to hide.

Immediately something stood out to me – they’re valued at 30x-32x above where they should be valued. Their stock price isn’t remotely justified by anything other than hype and good performance.

It bets heavily on its athletes. After Jordan Spieth failed to win the Masters, the stock fell over 5.5%. It’s a similar story with all of its other athletes. Under Armour is expected to issue a positive earnings report, but with all the hype around Adidas (Courtesy of your friendly neighborhood Kanye West) and Nike products, there really hasn’t been much room this year for UA to sell anything impressive.

Oh and here’s one more stat that should worry you. Under Armour’s expenses have risen 9% Q/Q, while sales have only risen 2.5%. If costs continue to increase, and sales don’t go up dramatically, things aren’t going to look good. Nike has managed to successfully cut costs by over 6% and sales have gone up. Similar story with Adidas. With such stiff competition unless Under Armour sees some radical changes I just don’t think the stock is worth it.

I’ll make another post if my stance on UA changes.

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