“Under Amour’s men’s apparel has run out of growth opportunities. The company gets 35% of its men’s apparel sales, which in total comprise 53% of its revenues, from compression and while Under Amour’s done a lot to broaden athletes’ use of compression, it’s now seeing a lot of competition from other players like Nike and Champion… At Deckers the five largest customers accounted for 30% of worldwide sales in 2008. Under Amour’s banking on two customers — Dick’s and Sports Authority. 31% of their net revenues in which means that Under Amour’s has much less control over its own destiny…Plus Uggs have continued to gain market share at Nordstroms. Just ask yourself this question, who would you rather have selling your products? Dick’s, Sports Authority, or Nordstrom?…
Ugg sales have been accelerating on a weekly basis. I’m told this is a great season for Uggs. U.S. Uggs’s sales growth should be up 15% year over year… Under Armour on the last quarterly conference call the company said they expect revenues for the second half of 2009 to decline by 8%. Under Armour also said it’s going to mark down some of its current products…I think Deckers is clearly the better company on all counts. Only trading tone times expected Under Armour trades at a huge multiple of 26 times earnings. Deckers is cheaper when you count for Under Armour’s higher projected growth rate. Deckers up 6%. Under Armour’s already up 23%. You missed the Under Armour trade. The charts of these to companies look almost exactly the same but based on the fundies Deckers is a buy, sell Under Armour I don’t want it.” — CNBC’s Mad Money 10/13/2009
On Tuesday’s Mad Money, Jim Cramer took two specialty apparel makers Off the Charts. He compared Deckers Outdoor Company (DECK) best known for their line of Ugg boots, to sports apparel maker Under Armor (UA). On a technical basis, he said the charts look very similar and both stocks are sending buy signals. However Cramer, like us, values fundamental factors more heavily than reading charts. In terms of fundamentals, he made the argument that Decker is much more attractive than is Under Armour.
While we think that many of Cramer’s points are valid, we actually have a different take on these valuations of these two companies. Based on a standard forward looking P/E multiple Deckers is more attractive than is Under Armour. We are also concerned about the competition from larger sports apparel companies that will threaten UA, such as Nike. However, as you can see from our historical ratings charts, we have UA rated Undervalued, while DECK is Fairly Valued by our methodology.
One of the main things we look for in a stock is if it priced outside of its historical valuation ranges. In this case, it is Under Armour that is priced well below is historically normal ranges of price-to-cash earnings and price-to-sales, whereas Deckers is currently priced comfortably within those valuation ranges. We cannot deny the explosive sales growth of Deckers in the past two years, largely thanks to Uggs, and we think that the Deckers should sell for about $87 based on the company’s fundamentals. In contrast, Cramer says that Under Armour has lowered sales guidance for the second half of the year, but interestingly that sentiment has not been reflected in analysts’ sales estimates. The consensus of about twenty Wall Street analysts is for steady growth in the high single digit range compared to last year. Certainly, those sales figures would be nothing to panic over, if in fact the second half of the year comes in in that neighborhood. Given the discounting, we may be a little too optimistic on the sales front.
Even though we have Under Armour rated slightly more positively, neither one of these stocks is particularly attractive to us. The growth of Under Armour has undoubtedly cooled, and it may never fetch the same valuation from the market as it once did. As for Deckers, they have the growth and the hot product right now, but we believe that it does not have much upside potential at this price. If we had to make a choice, it would probably be Under Armour, but investors can find more attractive bargains elsewhere. After all, the 29 companies in the Textile- Apparel industry that we follow have appreciated about 40% in the last 13-weeks. We would not be the least bit surprised to see a bit of a pullback, especially in the absence of a reversal of the current trends in consumer spending.