In the first couple sessions of 2017, laggards from 2016 have been the biggest winners. Under Armour Inc (NYSE:UAA) and Skechers USA Inc (NYSE:SKX) are no exception. UAA stock and SKX stock have rallied 5% and 4%, respectively, in the first two sessions of the year.
Many believe that investors are rotating into laggards, those that were oversold last year and now present investment value. The big question is whether Under Armour and Skechers fit into this conversation?
Based on BNL Finance’s independent research, SKX does in fact present value whereas UAA is due for another rough year.
Why Under Armour stock owners must be careful
What concerns us about UAA is the fact that Under Armour stock finished 2016 right at 52-week lows. Yes, it has bounced off lows of $29/share, but UAA is still very close and could very well be getting a small recovery bounce before heading even lower.
That said, we previously said that Under Armour is well positioned to take on Nike (NYSE:NKE) in footwear long-term, after realizing that Under Armour is a legitimate competitor in the apparel space. As a result, we recently upgraded UAA stock from “Strong Sell” to “Hold” after calling its peak at $45.
While we maintain a “Hold” rating, we also have an “Underperform” rating on Under Armour stock for 2017. Because despite its very impressive revenue growth above 20%, Under Armour stock trades at 45 times FY2017 expected EPS.
To put that in perspective, Under Armour stock trades at 25 times FY2020 earnings. That’s if UA can maintain 20% EPS growth over the next three years. When you think about it that way, and not in terms of UAA stock performance, its clear there is not a lot of near-term upside, if any.
SKX stock is a different story
Skechers is not growing at the same rate as UA, with expected revenue growth of 8% this year, but SKX stock is far cheaper. Skechers stock trades at just 14x FY2017 EPS, which puts it slightly below fair value. When you factor the company’s growth, Skechers stock is a value investment.
With that said, Skechers is a company that has been picking up market share in the footwear space for the last several years. 2016 was a bit of a bridge year where Skechers made some investments, prioritized design & marketing, and is now prepared to launch a new lineup.
Based on reports from Wells Fargo and Buckingham Research, Skechers new line, presented at the Fashion Association of New York trade show, will cause SKX to reach a sales inflection point here in the next quarter or two. In other words, expect accelerated growth in 2017.
How Under Armour can create value
We believe the market has not figured Skechers’ new products into SKX stock, or the potential for an acquisition. Recently, we explained why Skechers (or Michael Kors) would be the perfect suitor for Under Armour, thereby giving UA a second brand like Nike has Jordan or Gap has Old Navy. Furthermore, it would strengthen Under Armour’s presence in footwear.
While it is unlikely that Under Armour will make such a move, it would be very wise for UA to put its valuation to work and acquire a company of similar size for a quarter the valuation. That would create shareholder value for UA stock, while giving Skechers stock owners a buyout pop.
Regardless, both are companies with long-lasting business models that will create long-term value. However, because of their respective valuations, Skechers stock has upside this year and more upside over the course of many years, whereas Under Armour stock owners will have to wait a while.