Samta Khinda - Industry Analysis Presentation NIKE
UA Equity Valuation Examination (Sample Project)
1. UNDER ARMOUR
1
-‐
Shares
Currently
Over-‐priced
as
of
December
31st
2013
(date
of
latest
filing)
-‐ Short
or
sell
UA
stock
(Minimize
your
losses)
-‐ Analyst
Name:
Raphael
Denize
(6406365)
2. AGENDA
2
RecommendaOon
(Conclusion)
ReconciliaOon
to
Arrive
at
One
Share
Price
Discounted
Cash
Flow
ValuaOon
Company
Analysis
Economic
Analysis/Industry
Analysis
4. Strengths
• Leader in providing high tech undergarment for athletes.
• They are gaining market share at a higher rate than its
competitors.
• Their brand is easily recognizable by consumers which has
allowed them to be successful in entering new segments and
competing with firms like Nike and Adidas.
• They have been able to attract females and the younger
generation. This is currently driving their growth .
4
5. Weaknesses
• RelaOvely
high
cost
of
producOon
as
wages
conOnue
to
increase
making
operaOng
margins
relaOvely
low
around
(10%
historically).
• Their
lack
of
patents
internaOonally
means
that
anyone
can
copy
their
products
and
produce
them
at
a
cheaper
price.
•
They
are
in
a
really
compeOOve
and
declining
market,
with
high
risk
of
subsOtute
products
and
high
costs
for
raw
materials.
• They
also
have
a
limited
number
of
distributors
and
do
not
have
an
internaOonal
presence.
• In
order
to
conOnue
to
grow
they
will
have
to
conOnue
to
diversify
their
product
mix
in
this
declining
industry.
• They
will
be
compeOng
with
much
larger
companies
that
have
a
lot
more
money
on
hand
to
spend
on
markeOng
and
on
capital
to
grow
their
sales.
• ConOnuing
to
spend
on
capex
will
be
crucial
to
the
conOnued
growth
of
UA
in
the
industry.
5
6. SWOT
Analysis
6
-‐ Heavy
compeOOon
in
the
sporOng
industry.
-‐ DifficulOes
differenOaOng
in
footwear
sector.
-‐ Unpredictable
US
economy.
THREATS
-‐ Rapid
decline
in
footwear
sales.
-‐ Largely
dependent
on
US
market.
-‐ Narrow
exposure
in
professional
sporOng
industry.
WEAKNESSES
STRENGTHS
-‐ Dominant
Presence
in
Football
and
Baseball
market
in
North
America.
-‐ Pioneer
and
leader
of
the
US
performance
apparel
industry.
-‐ Strong
relaOonship
with
distribuOon
channels.
-‐ Culture
focused
on
sports
related
performance.
-‐ Strong
brand
recogniOon
in
North
America.
7. SWOT
Analysis
7
OPPORTUNITIES
• Invest
in
R&D
in
order
to
develop
innovaOve
footwear
especially
in
the
specialty
footwear
segment.
• Penetrate
the
European
and
Asian
markets
by
targeOng
sports
like
soccer
that
are
popular
over
there.
• Implement
customizaOon
features
like
Nike
ID
they
have
been
bringing
in
a
lot
of
money
for
Nike.
So
much
that
Adidas
soon
followed
suit.
This
is
the
design
my
own
shoe
feature
for
Nike.
If
implemented
properly
shoe
sales
will
grow
for
Under
Armour.
8. More
OpportuniOes
for
Growth
8
- Invest in R&D to develop new and
innovative performance shoes.
- Sponsor more prominent athletes in
their respective sports.
- Incentive programs for distributors.
- Continue innovating in specialty
footwear category such as cleats in
football and soccer and endorse
successful athletes.
- Capitalize on performance apparel.
- Sponsor major European and Premier League
teams. Soccer is the number one followed
sport in the world. Entering that market will
be vital to international success.
- Sponsor key players in top European sports
since everyone around the world watches
European soccer that could be a good start.
- So far Under Armour has attempted to grow
internationally by investing in soccer and
endorsing Japanese teams as well as select
teams in the Mexican league.
DifferenOate
in
the
Footwear
Market
Penetrate
the
European
and
Asian
Markets
9. Stock
Performance
9
As
you
can
see,
Under
Armour
Inc.
has
been
consistently
outperforming
the
market.
This
may
be
due
to
the
fact
that
Under
Armour
is
sOll
a
relaOvely
young
company
in
comparison
to
its
compeOtors
.
It
has
just
begun
to
diversify
its
product
segments
in
order
to
conOnue
growing.
11. Industry
Forecasted
Revenue
Growth
By
Segment
11
USD million 2013 2014 2015 2016 2017 2018
Apparel 298,862.50 301,443.60 306,043.50 311,316.90 317,120.50 319,538.80
Growth (%) _________ 0.864% 1.526% 1.723% 1.864% 0.763%
Footwear 66,999.80 68,187.90 68,876.90 69,653.60 69,991.60 70,925.00
Growth (%) _________ -2% -1% -1% 0% -1%
Sportswear 81,674.30 84,075.10 86,961.70 89,667.90 91,715.20 93,983.60
Growth (%) _________ 2.94% 3.43% 3.11% 2.28% 2.47%
-‐ As
you
can
see,
the
sporOng
goods
industry
is
in
the
decline
stage
of
the
product
life
cycle.
-‐ In
order
to
sustain
conOnued
growth
a
substanOal
amount
of
capital
will
have
to
be
spent
product
extension
and
improvement
in
order
for
Under
Armour
to
differenOate
its
product
from
the
compeOOon.
12. PORTER’S
5
FORCES
12
THREAT
OF
SUBSTITUTE
INDUSTRY
RIVALRY
SUPPLIER
POWER
THREAT
OF
NEW
ENTRANTS
BUYER
POWER
13. BUYER
POWER
13
HIGH
Consumer
has
many
op9ons
under
the
following
criteria:
-‐
High
quality
-‐
Performance
enhancement
-‐
Style
-‐
InnovaOve
DifferenOate
your
product
by
exceling
in
the
execuOon
of
consumer
criteria.
SITUATION
MITIGATION
14. SUPPLIER
POWER
14
LOW
-‐ Large
number
of
suppliers
that
can
provide
the
necessary
raw
materials
-‐ Low
cost
associated
with
materials
ConOnue
using
flexible
manufacturing
contracts
upon
expansion.
Drive
improve
operaOng
margins
by
improving
operaOonal
efficiency
and
creaOng
higher
end
products
with
greater
margins.
SITUATION
RecommendaOon
15. THREAT
OF
SUBSTITUTE
15
LOW
-‐ Non
performance
apparel
(cokon
t-‐shirts)
-‐ Growing
performance
apparel
industry
Ensure
product
innovaOon
is
aligned
with
the
performance
industry.
ConOnue
targeOng
children
and
female
in
order
to
drive
growth.
The
populaOon
is
aging
SITUATION
RecommendaOon
16. THREAT
OF
NEW
ENTRANTS
16
LOW
-‐ Complex
distribuOon
networks
-‐ High
level
of
R&D
required
-‐ Capital
requirement
-‐ Establishing
a
brand
ConOnue
leveraging
your
posiOon
as
industry
pioneer
SITUATION
RecommendaOon
17. INDUSTRY
RIVALRY
17
HIGH
-‐ Giant
compeOtors
Nike
and
Adidas
-‐
Established
distribuOon
network
-‐
High
level
of
capital
-‐
Strong
market
shares
-‐
Strong
global
brand
reputaOon
Invest
heavily
in
R&D
and
markeOng
to
improve
brand
equity.
ConOnue
to
invest
in
Capex
in
order
to
come
up
with
innovaOve
ways
to
akract
customers
in
order
to
take
market
share
away
Nike
and
Adidas.
SITUATION
RecommendaOon
19. Year
Over
Year
DistribuOon
of
Sales
19
- As you can see from the above table, sales have been contributing the same amount for Under Armour and we are not
optimistic that those figures will change very much since sales internationally are growing at around the same rate as sales in
North America.
- International sales grew at an average rate of 30% over the past 4 years while sales in North America grew at a rate of 28% in
North America.
- We believe that international sales and North American sales will continue to grow at the same rate in the future and that
international sales will continue to contribute to about 6% of the sales figure.
2013 2012 2011 2010 2009
% of % of % of % of % of
(In
thousands)
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
Net
Revenues
North
America
$2,193,739 94% $1,726,733 94% $1,383,346 94% $997,816 94% $808,020 94%
Other foreign
countries
138,312 6% 108,188 6% 89,338 6% 66,111 6% 48,391 6%
Total net
revenues
$2,332,051 100.00% $1,834,921 100.00% $1,472,684 100.00% $1,063,927 100.00% $856,411
20. Sportswear
ConsumpOon
by
Country
20
As
you
can
see,
the
U.S
spends
a
lot
more
on
sportswear
than
any
other
country.
They
make
up
35%
of
the
market.
UA
will
have
to
capitalize
on
their
home
market
while
maintaining
there
global
growth
rate
of
30
%
in
order
to
conOnue
growing
at
a
reasonable
rate.
They’ve
been
growing
internaOonally
at
around
the
same
rate
as
their
domesOc
growth
in
the
US.
Us
sales
sOll
make
up
about
90%of
sales
for
Under
Armour.
21. Growth
RaOonale
21
• We
decided
to
grow
the
sales
by
product
mix
rather
than
by
there
internaOonal
growth
since
there
internaOonal
growth
has
been
growing
at
virtually
the
exact
same
rate
as
sales
in
North
America.
• Given
brand
relevance
and
recogniOon,
we
believe
ongoing
product
innovaOon
will
conOnue
to
drive
world
wide
growth.
An
example
of
such
innovaOon
is:
•
The
syntheOc
performance
apparel
market
which
keep
athletes
warm
in
cold
temperatures
and
cool
and
hot
temperatures
is
a
growing
market
and
under
armour
a
leader
in
that
market.
They
have
about
60%
of
that
market
share.
• Charged
Cokon
technology
(created
a
$200M
new
business
in
two
years)
• Growth
in
footwear
(every
1%
of
market
share
in
just
the
running
category
represents
an
incremental
$60M)
• Growth
in
non-‐tradiOonal
distribuOon
(department
and
specialty
stores)
• Investments
in
the
women’s
business
(represenOng
29%
of
sales
today)
Clearly
Capex
has
consistently
paid
off
for
Under
Armour!!
22. RaOonal
for
Growth
Rates
22
-‐ A
thorough
industry
analysis
shows
us
that
footwear
sales
will
be
higher
than
apparel
sales
in
the
industry.
Therefore
it
will
be
crucial
for
Under
Armour
to
invest
and
innovate
in
that
department
in
order
to
conOnue
to
grow.
-‐ Last
year’s
decline
in
sales
growth
in
footwear
products
can’t
persist.
Under
Armour's
CEO
has
realized
that
and
has
invested
a
lot
in
that
department
and
has
even
added
strategic
members
to
his
team
in
order
to
take
a
share
of
that
segment
.
23. More
RaOonale
for
Sales
Growth
23
Product Mix Year over Year Sales Growth by Product Mix Forecasted Sales Growth by Product Mix
Year 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Apparel 13% 31% 31% 23% 27% 25% 20% 15% 10% 10%
Footwear 61% -7% 43% 32% 25% 35% 30% 25% 25% 25%
Accessories 11% 25% 202% 25% 30% 20% 20% 20% 15% 10%
License Revenues 11% 18% -7% 22% 23% 13% 14% 13% 17% 16%
- We believe that accessories sales will continue to grow at a very high rate and we have assigned them a growth rate of
20% in 2014 to 2016 then it will decrease to about 10 by 2017. We also see apparel sales increasing due to increased
demand by women. Investments were made to design products that were fashionable in order to attract women. Now
sales of women products make up around 29% of total sales. We expect that figure to grow at a reasonable rate. Thus, we
have assigned the apparel segment a growth rate of 25% for 2014. We believe it won’t be able to sustain such a high
growth rate and will decrease slightly to 15% in 2016.
- Management has stated that one of its near-term product focuses is the rollout of a new, improved footwear line that will
compete in the higher ASP ($100+) performance category versus their prior, less successful launch in footwear ($50-
$60).
- We believe that this will bring the footwear sales growth to new highs. We have projected sales in the footwear segment
at 35% year over year. We believe that this is a bit conservative considering the fact that footwear purchases will make up
about 40% of all sales in the sports wear industry.
- For license sales we believe sales growth will remain steady; therefore, we applied the moving average to the determine
sales from 2014 to 2018.
24. Growth
RaOonal
ConOnued
• We
lowered
the
values
as
Ome
passed
because
there
would
be
no
way
that
UA
sustain
such
high
growth
rates
in
the
future.
• They
are
already
amongst
the
fastest
growing
firms
in
the
industry
due
to
the
fact
that
they
are
relaOvely
new
entrants
in
the
market.
• Also,
the
industry
is
in
the
decline
stage
of
the
product
life
cycle;
therefore,
Under
Armour
will
inevitably
have
to
stop
growing
at
such
a
high
rate.
• There
will
come
a
point
where
UA
will
be
unable
to
take
anymore
market
share
away
from
established
firms
like
Nike
and
Adidas
and
will
grow
at
a
rate
closer
to
the
GDP
growth.
24
27. ForecasOng
EBIT
(Looking
at
Historic
Trends)
27
- The graph depicted aside shows that EBIT
margin has slowly been increasing since
2009. It also shows the forecasted EBIT
for 2012 and and 2013. Though the 2012
forecast was dead on, the 2013 forecast
wasn’t correct. The EBIT actually stayed
at the same level as 2012.
- We doubt that the margins will get to the
2007 levels within the next 5 years since
lower margin products like footwear will
be sold in higher quantities. We believe
that margins will remain at 11% do to that
fact.
- The price of cotton is at an all time low at
the moment we expect the price to
appreciate. This will eat into our margins.
28. EBIT
Forecast
28
Years 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
EBIT 76,925 85,273 112,355 162,767 208,695 265,098 $322,059 $390,493 $456,400 $468,675 $475,568
EBIT as a
Percentage
of Sales 10.61% 9.96% 10.56% 11.05% 11.37% 11.37% 11% 11% 11% 10% 9%
EBIT Margin
Growth As of 2009 6.06% 4.66% 2.91% -0.05% -3.23% 0.00% 0.00% -9.09% -10.00%
We
believe
that
the
EBIT
margin
will
stay
constant
around
11%
for
the
next
three
years
then
fall
to
10
%
in
2017
and
9%in
2018
because
we
expect
shoe
sales
and
the
sports
accessories
segments
to
conOnue
to
grow.
Those
products
are
relaOvely
low
in
product
margin
in
comparison
to
apparel.
Eventually
they
will
no
longer
be
able
to
sustain
an
EBIT
margin
at
11%
due
to
such
high
growth
in
those
two
segments.
29. ForecasOng
Capital
Expenditures
Capital
expenditures
for
2014
are
expected
to
be
around
-‐4
%
of
sales
as
it’s
been
previously,
in
order
to
support
their
direct
to
consumer
and
internaOonal
businesses
and
further
develop
and
expand
their
global
office
footprint.
This
is
going
to
to
be
expensive
so
they
are
funding
there
growth
with
4%
of
sales
every
year
to
grow
steadily
at
a
constant
rate.
They
will
also
have
to
conOnue
spending
on
R&D
and
markeOng
to
make
their
products
stand
out
to
that
of
their
compeOtors.
They
should
also
start
thinking
about
partnerships
with
technology
firms
like
Nike
has
done
with
Apple.
We
have
seen
Under
Armour
akempt
to
do
this
with
Snapchat
my
story.
29
Year 2006 2007 2008 2009 2010 2011 2012 2013
Capital Expenditures -15,100.0 -34,000.0 -38,600.0 -19,800.0 -30,200.0 -56,200.0 -50,700.0 -87,800.0
Sales 430,689.0 606,561.0 725,244.0 856,411.0 1,063,927.0 1,472,684.0 1,834,921.0 2,332,051.0
Capex as a Percentage
of Sales -4% -6% -5% -2% -3% -4% -3% -4%
Year 2014F 2015F 2016F 2017F 2018F
Capex as a Percentage of Sales -3.74% -3.74% -3.74% -3.74% -3.74%
Sales $2,927,816.62 $3,549,943.89 $4,149,092.83 $4,686,759.37 $5,284,093.04
Capital Expenditures -$109,531.06 -$132,805.14 -$155,219.60 -$175,333.97 -$197,680.52
30. ForecasOng
DepreciaOon
30
DepreciaOon
will
trend
with
sales
growth
because
as
they
grow
they
will
need
to
spend
more
on
fixed
assets
like
equipment
in
order
to
improve
efficiency.
We
found
depreciaOon
as
a
percentage
of
sales
and
depreciaOon
has
consistently
been
around
2-‐3%,
therefore,
we
used
the
eight
year
moving
average
to
figure
out
the
future
depreciaOon
as
a
percentage
of
sales.
Then,
we
mulOplied
that
figure
by
the
sales
to
get
depreciaOon
for
that
year.
Year 2006 2007 2008 2009 2010 2011 2012 2013
Sales 430,689.0 606,561.0 725,244.0 856,411.0 1,063,927.0 1,472,684.0 1,834,921.0 2,332,051.0
Depreciation 9,824.0 14,622.0 21,347.0 28,249.0 31,321.0 36,301.0 43,082.0 50,549.0
Depreciation as
Percentage of
Sales 2.28% 2.41% 2.94% 3.30% 2.94% 2.46% 2.35% 2.17%
Year 2014F 2015F 2016F 2017F 2018F
Depreciation $76,335.22 $94,003.26 $111,099.99 $123,940.29 $135,416.53
Sales $2,927,816.62 $3,549,943.89 $4,149,092.83 $4,686,759.37 $5,284,093.04
Depreciation as % of Sales 2.61% 2.65% 2.68% 2.64% 2.56%
31. Non
Cash
Net
Working
Capital
CalculaOon
31
Year 2006 2007 2008 2009 2010 2011 2012 2013
Cash/ Near Cash Items 70,655.0 40,588.0 102,042.0 187,297.0 203,870.0 175,384.0 341,841.0 347,489.0
Current Assets 244,952.0 322,245.0 396,423.0 448,000.0 555,850.0 689,663.0 903,598.0 1,128,811.0
Current Liabilities 71,563.0 95,699.0 133,110.0 120,162.0 149,147.0 183,607.0 252,228.0 426,630.0
Non-cash Net Working
Capital 102,734.0 185,958.0 161,271.0 140,541.0 202,833.0 330,672.0 309,529.0 354,692.0
Change in Non-Cash
NWC _________ 83,224.0 -24,687.0 -20,730.0 62,292.0 127,839.0 -21,143.0 45,163.0
32. ForecasOng
Non-‐Cash
NWC
32
Year 2014F 2015F 2016F 2017F 2018F
Change in NCNWC $8,308.75 $13,979.55 $14,262.41 $9,438.37 $12,588.56
Sales $322,059.83 $390,493.83 $456,400.21 $468,675.94 $475,568.37
Change in NCNWC %
Sales 3% 4% 3% 2% 3%
Year 2007 2008 2009 2010 2011 2012 2013
Change in Non-Cash
NWC $83,224.00 -$24,687.00 -$20,730.00 $62,292.00 $127,839.00 -$21,143.00 $45,163.00
Change in NCNWC %
Sales 14% -3% -2% 6% 9% -1% 2%
We
used
the
5
year
moving
average
of
the
NCNWC
as
%
of
sales
to
forecast
the
NCNWC
because
those
more
recent
years
are
more
indicaOve
of
the
true
levels
of
future
change
in
NCNWC.
The
future
values
for
change
NCNWC
as
%
of
sales
will
most
likely
be
between
-‐1%
and
3%.
We
think
so
because
current
assets
receivables
and
inventory
will
increase
as
sales
increase.
We
think
that
those
values
will
be
slightly
higher
on
average
than
payable
values
in
the
future.
33. Average
Risk
Free
and
Risk
Premium
Rates
33
Years Earnings on S&P Risk Free Rate RM
2003 4.87 4.25 0.62
2004 5.58 4.22 1.36
2005 5.47 4.39 1.08
2006 6.18 4.7 1.48
2007 5.62 4.02 1.6
2008 7.24 2.21 5.03
2009 5.35 3.84 1.51
2010 6.65 3.29 3.36
2011 7.72 1.88 5.84
2012 7.18 1.76 5.42
2013 5.81 3.04 2.77
Average ______________ 3.418181818 2.733636364
Found
the
average
risk
premium
and
risk
free
rate
for
the
past
10
years
using
the
S&P
500
as
the
index
since
UA
is
an
American
stock.
34. OpOmal
D/V
and
E/V
(WACC)
34
Name Tot Debt LF Tot CE LF
UNDER ARMOUR INC-CLASS A $191,648,000.00 $1,254,141,056.00
NIKE INC -CL B $1,347,000,064.00 $11,105,000,448.00
COLUMBIA SPORTSWEAR CO $18,082,000.00 $1,316,059,008.00
SKECHERS USA INC-CL A $119,620,000.00 $1,050,705,024.00
ADIDAS AG $1,491,484,813.09 $7,726,422,330.14
WOLVERINE WORLD WIDE INC $1,096,600,064.00 $962,099,968.00
DECKERS OUTDOOR CORP $188,014,000.00 $896,006,976.00
HANESBRANDS INC $2,291,502,080.00 $1,464,669,952.00
VF CORP $2,083,523,968.00 $5,862,360,064.00
QUIKSILVER INC $840,748,992.00 $112,192,000.00
PVH CORP $3,907,399,936.00 $4,530,299,904.00
KATE SPADE & CO $408,796,992.00 $70,166,000.00
STEVEN MADDEN LTD $- $685,390,016.00
RALPH LAUREN CORP $510,000,000.00 $4,028,999,936.00
ICONIX BRAND GROUP INC $1,401,783,040.00 $918,404,992.00
CROCS INC $12,973,000.00 $545,208,000.00
TOTAL VALUES $15,909,176,949.09 $41,842,735,658.14 $57,751,912,607.24
D E V
Used the industry D /V and E/V as the optimal D/V and E/V since Under Armour’s D/E fluctuated a whole lot.
After calculating it we get a value of 0.275 for D/V and a value of 0.724 for E/V.
35. BETA
35
Regressed
returns
of
Under
Armour
against
that
of
the
S&P
500
in
order
to
get
the
best
beta
calculaOon.
We
did
this
from
2003
to
the
present
day.
We
went
as
far
back
as
possible
in
order
to
get
the
most
accurate
value.
The
Adjusted
beta
is
the
best
beta
esOmate
of
a
company’s
future
beta
which
is
why
we
will
use
it
for
our
cost
of
equity
calculaOon.
The
beta
is
then
1.357.
36. Cost
of
Equity
(WACC)
36
Rf Beta Risk Premium
3.418181818 1.357 2.73
Cost of Equity 7.122791818
Cost of Debt
Interest Coverage ratio of 68.30. This gives UA a AAA rating
which means cost of Debt= Rf+ Spread. As per the table
above, the cost of debt is: 3.418%+ 1.25%= 4.67%
37. WACC
CalculaOon
37
VARIABLE RATE RATIONALE
Tax 35%
Tax rate in the US for corporations id given as 35% in 2013 on
KPMG website. We do not expect that to change too much .
Ke 7.12 % Calculated using CAPM on previous slide.
Kd 4.67 %
Calculated using interest coverage ratio calculation is on
previous slide.
D/V 0.27547446
Both D/E and E/V were determined using industry averages.
The explanations were shown on slide 27.E/V 0.72452554
WACC=
(D/V)(Kd)(1-‐T)
+
(E/V)(Ke)
=
((0.2754)(4.67%)(1-‐0.35))+
(0.724)(7.12%)
=
5.99%
or
6%
38. FCFF
CalculaOon
38
Year 2014F 2015F 2016F 2017F 2018F
Terminal
Growth Rate
FCFF $167,834.30 $201,039.55 $238,278.12 $243,807.31 $234,266.89 2.32%
Year 1 2 3 4 5
Discount
Factor 1.0599 1.12338801 1.190678952 1.262000621 1.337594458 Terminal Value
PV $158,349.18 $178,958.25 $200,119.54 $193,191.12 $175,140.45 $4,882,934.81
-‐ Discounted
the
free
cash
flow
to
the
present
value
-‐ Used
a
terminal
growth
rate
of
2.32%
by
determining
the
average
GDP
growth
rate
in
the
US
and
Canada
in
the
last
5
years.
39. Enterprise
Value
and
Stock
Price
39
(In thousands except per share value )
EV $5,788,693.34
Total Debt 524,387.0
Cash 347,489.0
Market Cap $5,611,795.34
Number of Shares 216,000.00
Price per Share $25.98
The
price
as
of
the
filing
date
is
about
23.9875.
We
used
this
price
because
we
used
all
latest
filing
data.
We
therefore
thought
it
most
appropriate
to
value
this
firm
as
of
that
date.
40. SensiOvity
Analysis
(Lower
Revenue
Growth)
40
Pessimis9c
Outlook
(45%
Probability)
-‐ Decrease
revenue
growth
by
50
%
each
year
off
our
base
case
in
pessimisOc
direcOon.
-‐ Also
changes
NCNWC,
EBIT
and
all
variables
affecOng
the
FCFF
calculaOon
by
1:1
raOo.
-‐ The
new
firm
value
in
this
circumstance
would
be
about
3.98
billion.
-‐ The
new
stock
price
would
be
$17.63/
share.
41. SensiOvity
Analysis
(Higher
Revenue
Growth)
41
Pessimis9c
Outlook
(10%
Probability)
-‐ Increase
revenue
growth
by
50
%
each
year
off
our
base
case
in
opOmisOc
direcOon.
-‐ Also
changes
NCNWC,
EBIT
and
all
variables
affecOng
the
FCFF
calculaOon
by
1:1
raOo.
-‐ The
new
firm
value
in
this
circumstance
would
be
about
11.6
billion.
-‐ The
new
stock
price
would
be
$52.90/
share.
43. Preliminary
AssumpOons
43
-‐ All
data
used
in
relaOve
valuaOon
extracted
from
Bloomberg
terminal.
-‐ All
data
retrieved
respecOve
the
year
ended
December
31,
2013.
-‐ All
fundamental
indicators
are
latest
filing
indicators
which
is
why
we
used
the
stock
price
as
of
that
date
as
a
benchmark
to
determine
whether
the
company
is
overvalue
or
under
valued.
44. Legend
44
Legend Colors Point System Range D/E
Range for CFs and
Growth
Range for
Current
Ratio
Altman Z-
Score Beta
Average --------------------------------------------------------------------------------------------- --------------------------------- ----------------
Benchmark --------------------------------- ----------------------------------------------------------- --------------------------------- ----------------
Very Similar 3 0-20 0-10% Difference
0.5
difference
0-5.00
Difference
0-0.25
Difference
Moderately
Similar 2 20-30 10-20% Difference
0.5 -1.0
Difference
5-10.0
Difference
0.25-0.5
Difference
Not Similar 1 >30 > 20% Difference
>1.0
Difference>10 Difference
> 0.5
Difference
N/A 0 N/A N/A N/A N/A N/A
-‐ This
point
system
will
be
our
basis
for
eliminaOng
the
most
irrelevant
firms
and
for
choosing
the
firms
that
were
most
comparable
to
Under
Armour.
We
will
use
CF
MulOples,
Growth
MulOples
and
Risk
MulOples
to
isolate
for
the
most
comparable
firms.
-‐ Ranges
for
similarity
idenOficaOon
determined
by
absolute
percentage
range
difference
for
CF
and
growth,
absolute
value
for
the
range
of
D/E.
Also,
absolute
differences
were
used
for
the
rest
of
the
debt
metrics.
45. Comparable
Firms
45
Name
NIKE INC -CL B
COLUMBIA SPORTSWEAR CO
SKECHERS USA INC-CL A
ADIDAS AG
WOLVERINE WORLD WIDE INC
DECKERS OUTDOOR CORP
HANESBRANDS INC
VF CORP
QUIKSILVER INC
PVH CORP
KATE SPADE & CO
STEVEN MADDEN LTD
RALPH LAUREN CORP
ICONIX BRAND GROUP INC
CROCS INC
UNDER ARMOUR INC-CLASS A
-‐ Under
Armour’s
comparable
firms.
These
are
the
firms
in
the
sportswear
and
footwear
industry.
They
are
basically
UA’s
direct
compeOtors.
-‐
We
understand
that
a
similar
firm
is
not
one
in
the
same
sector
necessarily
but
one
that
is
similar
in
CFs,
Risk
and
Growth.
We
however
reduced
our
sample
size
substanOally
by
using
the
direct
compeOtors
because
they
would
have
similar
selling
prerogaOves
and
profit
moOves.
46. Cash
Flow
46
Name
ROE (%) ROA (%)
NIKE INC -CL B 25.747 15.925
COLUMBIA SPORTSWEAR CO 9.359 7.178
SKECHERS USA INC-CL A 13.322 8.834
ADIDAS AG 10.582 5.368
WOLVERINE WORLD WIDE INC 13.711 4.472
DECKERS OUTDOOR CORP N/A N/A
HANESBRANDS INC 26.548 7.407
VF CORP 22.505 12.160
QUIKSILVER INC -132.861 -24.380
PVH CORP 7.467 2.777
KATE SPADE & CO N/A 23.387
STEVEN MADDEN LTD 18.640 13.743
RALPH LAUREN CORP 18.778 11.892
ICONIX BRAND GROUP INC 16.443 5.439
CROCS INC -5.134 -1.921
UNDER ARMOUR INC-CLASS A 16.617 10.933
Average 4.409 6.881
Cash Flow
-‐ Used
Under
Armour
financials
as
a
benchmark
to
compare
other
firms:
-‐ ROA:
want
to
see
how
comparable
firms
are
using
their
assets
to
generate
returns.
-‐ ROE:
want
to
see
how
a
comparable
firm
generates
income
to
share
holders.
47. Growth
47
-‐ Growth
indicators
assessed
included
5
Year
Revenue
Growth,
5
Year
OperaOng
Income
Growth,
and
EBITDA
Geometric
Growth.
-‐ Thought
it
was
relevant
to
look
at
similariOes
in
our
past
growth
pakerns
to
see
how
closely
companies
are
growing
in
the
same
direcOon.
48. Risk
48
-‐ Risk
indicators
included
analyzing
the
comparable
firms’
betas,
financial
leverage
with
regards
to
debt/
equity
posiOon,
and
look
at
other
risk
metrics
such
as
Altman
Z-‐score
and
current
raOo.
-‐ Wanted
firms
winth
comparable
risk
levels
in
terms
of
capital
structure
and
perceived
risk
by
lending
insOtuOon.
49. IsolaOng
for
the
Most
Comparable
Firms
49
-‐ The
most
comparable
firms
were
the
ones
with
the
most
points.
-‐ The
summaOon
of
points
lead
us
to
eliminate
a
few
firms
and
keep
four
comparable
firms.
-‐ 4
firms
remain
arer
the
point
system.
Then,
we
conducted
a
weighted
average
based
on
relaOve
point
score
and
use
that
to
find
the
jusOfied
P/E
raOo.
50. Chose
P/E
RaOo
as
a
MulOple
50
-‐ We
chose
P/E
because
it
is
a
mulOple
that
makes
it
easy
to
tell
whether
a
stock
is
overvalued
or
undervalued.
-‐ We
then
used
Algebraic
rearrangement
to
forecast
the
stock
price
of
UA
based
on
their
2013
year
ended
earnings
report.
Name Points P/E Weighted Average P/E
NIKE INC -CL B 22.000 24.06625 5.882861111
COLUMBIA SPORTSWEAR CO 21.000 20.441515 4.769686833
SKECHERS USA INC-CL A 23.000 20.673409 5.283204522
STEVEN MADDEN LTD 24.000 16.52529 4.406744
Total Points 90.000 20.34249647
-‐ We
have
a
JusOfied
P/E
RaOo
of
20.3424
-‐ We
have
a
Net
Income
of
about
$162.3
million.
-‐ Therefore
the
share
price
is
$15.67
52. Reconciling
(Arriving
at
one
Price)
52
OpOmisOc
Share
Price=
$52.90/share
(10%
probability)
Base
Share
Price=
$23.98/share
(40%
probability)
New
Share
Price
We
constructed
a
probability
tree
for
the
three
growth
probable
scenarios
found
using
DCF
and
also
using
our
relaOve
valuaOon.
Given
what
we
know
about
the
future
of
the
industry
and
the
fact
that
this
is
a
highly
compeOOve
space,
we
found
it
more
likely
that
the
pessimisOc
approach
will
occur
instead
of
the
opOmisOc.
We
then
assigned
both
the
base
projected
share
price
calculated
on
DCF
and
the
pessimisOc
calculated
price
using
sensiOvity
analysis
and
assigned
them
both
probabiliOes
of
40%
of
occurrence
because
they
are
two
equally
likely
scenarios
since
the
industry
is
so
compeOOve.
We
then
assigned
the
top
value
(the
opOmisOc
value)
a
10%
likelihood
of
occurrence
as
well
as
the
bokom
value
which
ends
up
being
our
relaOve
valuaOon
the
same
likelihood
value
of
10%.
Every
stock
has
a
market
component
that
should
affect
its
value.
This
is
the
relaOve
valuaOon
it
it
is
what
the
market
thinks
the
stock
should
be
worth
based
on
the
prices
of
similar
firms
in
the
industry.
PessimisOc
Share
Price=
$17.63/
share.
(40%
probability)
RelaOve
ValuaOon
Price=
$15.67$/
share
(10%
probability)
53. Final
Price
53
-‐ We
are
strong
believers
in
market
inefficiency.
We
believe
that
investors
can
beat
the
market
by
value
invesOng.
However,
we
do
believe
that
the
market
outlook
on
the
stock
does
have
an
effect
on
the
stock
price
which
is
why
we
included
the
conducted
relaOve
valuaOon
into
the
probability
tree
on
the
previous
page.
-‐ To
find
the
final
price
we
then
take
the
probability
of
occurrence
of
each
those
strands
in
the
probability
tree
and
mulOply
it
by
the
stock
price
and
add
them
up.
-‐ We
then
get
a
final
stock
price
value
of
:
-‐ Final
Price=
(40%)*(17.63)+23.98*(40%)+15.67*(10%)+52.9*(10%)
=
7.052+9.592+1.567+5.29
=
$23.501/
share
54. RecommendaOon
(Conclusion)
54
-‐ We
will
use
the
adjusted
closing
price
of
December
31st
2013
to
determine
whether
UA
is
over
valued
or
undervalued.
We
used
the
adjusted
closing
price
because
it
gives
me
an
accurate
representaOon
of
the
firm’s
equity
value
a
value
that
is
beyond
the
market
value.
The
adjusted
closing
price
is
$24.27,
(market
price:
$
48.53).
Our
valuaOon
gives
us
a
stock
price
of
$
23.50
which
means
that
UA
is
overvalued
.
Therefore,
we
recommend
shorOng
or
selling
all
of
your
UA
holdings.
Average 26.50673423
UNDER ARMOUR INC-CLASS A 80.499542
NIKE INC -CL B 24.06625
COLUMBIA SPORTSWEAR CO 20.441515
SKECHERS USA INC-CL A 20.673409
ADIDAS AG 19.858585
WOLVERINE WORLD WIDE INC 17.88728
DECKERS OUTDOOR CORP
HANESBRANDS INC 21.182058
VF CORP 22.468246
QUIKSILVER INC
PVH CORP 17.11141
KATE SPADE & CO 42.862213
STEVEN MADDEN LTD 16.52529
RALPH LAUREN CORP 19.645685
ICONIX BRAND GROUP INC 21.366062
-‐ The
table
depicted
to
the
ler
shows
the
P/E
RaOo
for
all
the
firms
in
the
industry.
-‐ UA
is
clearly
over
valued
because
investors
are
currently
paying
$80
per
dollar
of
earnings
compared
to
the
industry
average
of
26.
-‐ This
table
backs
up
my
point
that
this
stock
should
be
sold
short
because
it
will
inevitably
decline.
