Morgan Stanley’s Under Armor Score Upgrade
Morgan Stanley raised its rating on Under Armor from ‘Overweight’ to ‘Equal weight’ on the stock’s decline in recent months and the company’s potential to ‘outperform its peers’ due to the combination of ‘lower relative supply chain risk and stronger relative China. performance, favorable channel checks and probably conservative forecasts for 2022.
The investment firm also raised its price target on Under Armor to $24 from $23. In afternoon trading, shares of Under Armor rose 50 cents, or 2.6%, to $19.58.
In a note released Wednesday morning, analyst Kimberly Greenberger noted that Under Armor shares are down 10% year-to-date and 25% since Under Armor’s earnings report in November. As a result, the stock’s P/E valuation is “well below” pre-pandemic levels and looks “cheap compared to peers with similar or lower growth trajectories.”
Greenberger wrote: “In our view, current trading levels suggest that the market 1) may have unfairly penalized UAA shares for vacancies weakness in specialty retail without considering its differentiated model and the product exposure, and 2) may not recognize the opportunity for a positive 2022 BPA. revisions, which we believe are unique in the smooth line space. Overall, we think the potential outperformance in 1H22 versus its peers could be a catalyst for the stock.
Morgan Stanley believes Under Armor could outperform its peers because its higher apparel mix (65% of revenue) and more diverse sourcing pose lower supply chain risk.
Greenberger said apparel is expected to move more quickly to normalized inventory levels compared to footwear, in part because the category has lower labor requirements and greater dormitory capacity for factory workers. factory to bring production back after pandemic disruptions. Garment production is also less concentrated in southern Vietnam, where pandemic-related shutdowns have been most widespread. Finally, garment factories are more often vertically integrated, which allows a faster resumption of production.
The analyst wrote, “As such, inventory and revenue risk is concentrated in 4Q21 for UAA relative to the footwear peers in 1Q22.”
Greenberger also believes Under Armor will be less disrupted by broader China weakness, as the brand has less exposure to the region than most of its peers. She further said that unlike many of its peers, Under Armor has not released a statement regarding its stance on sourcing in the Xinjiang region.
Reports arrived in March 2021 that China was calling for a boycott of Western brands, including Nike and Adidas, following comments about alleged abuses in mainland China’s Xinjiang cotton region. Some market watchers wonder if Western brands continue to be impacted.
Greenberger added, “As such, UAA may show better relative trends in China in 1H22, which could make the stock a safe haven within the broader sportswear group.
The analyst noted Morgan Stanley’s sporting goods industry channel audits in January were “clearly positive” for Under Armor compared to recent audits. She said: “This gives us confidence that the UAA turnaround in North America is working and that international perception is improving, which could support higher revenue growth relative to pre-COVID trends. .”
Finally, Greenberger said UA’s initial guidance for 2022 was likely conservative as forecasts had been conservative in the past and the stock had been rewarded for upward EPS revisions. She noted that Under Armor’s quarterly EPS had more than doubled Wall Street expectations for five straight quarters, and that management had raised its full-year guidance for four straight quarters. Greenberger also said, “While we recognize that this is a well understood dynamic in this stock, we believe it is undervalued at these price levels as it represents a unique opportunity.”
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