Inside Wall Street: Some Analysts Are Gung-Ho Over Under Armour

As sports activity and the fitness craze continue to win more devotees, specially designed "performance" apparel has been gaining a large share of the $28 billion sportswear market. Casual wear suitable for recreation, ranging from cotton t-shirts and sundry attire, to synthetic clothing designed for athletic activity has been increasingly attracting more people.

In particular, a line that's become a big part of the expanding active wear market is "performance" apparel, which last year accounted for $12 billion of the $28 billion spent on sports apparel. One major maker of such distinct sportswear is Under Armour (UA), which has been gaining share in the highly competitive, lucrative market, even as Nike (NKE) dominates in that field.

UA designs and produces a particular brand of performance apparel and footwear made of synthetic microfibers for men and women. The company is credited with inventing the "compression," tight-fitting apparel, its core clothing for serious athletes that regulates body temperature by absorbing perspiration, thus enhancing comfort, mobility, and performance.

New Product Opportunities

"Over the long-term, we see UA's strong and growing brand providing opportunities for new products, and expanding distribution supporting above-industry growth," says Marie Driscoll, analyst at Standard & Poor's. International sales plus the growing rise in demand for women's apparel will drive growth this year, she says.

Shares of UA, which went public in 2005 at $13 a share, has been a stellar performer since then, climbing to a 52-week high of $36.45 a share on Apr. 29, 2010. The market's steep dive in recent weeks pulled the stock down to as low as $30, but closed at just over $34 on May 27. However, Driscoll, who rates the stock a strong-buy, sees it jumping to $42 in 12 months. She forecasts the company will earn $1.17 a share in 2010, up from last year's 92 cents.

A key element of UA's success, says Driscoll, is its marketing strategy that includes the use of professional and collegiate athletes and sponsorship of sports events. In 2010, the company is hosting 50 sports games, camps and clinics at regional sites across the country, notes Driscoll. UA is also the title sponsor of the Under Armour All-America Lacrosse Classic, as well as the All-America Games in softball and volleyball for top high school athletes. "These efforts develop strong brand loyalty in young athletes that potentially will benefit Under Armour for decades," says Driscoll.

As a recognized athletic brand known for its performance apparel, UA is starting to make inroads in the active lifestyle market, notes Driscoll. The company's core performance apparel, which grew 31% in the first quarter of 2010, drove top-line growth.

One Goal: Trounce Nike

Can UA trounce Nike in the sportswear business? It certainly is trying by using its compression clothing to expand into the broader sportswear market.

"Under Armour is poised to become a leading global athletic brand, and we believe that over the long-term, the company should triple in revenues," says Robert F. Ohmes, analyst at Bank of America Merrill Lynch. The growth in its core apparel through continued market share gains and continued expansion of its direct-to-consumer marketing will spur overall growth, he says. And expansion of its footwear products in 2011 and beyond, plus the opportunities in the international markets, should add to the company's sales growth, says Ohmes. He rates the stock a buy, and figures the company will earn $1.10 a share in 2010, $1.30 in 2011, and $1.55 in 2012.

Probably because the sportswear market is so crowded and highly competitive, Wall Street isn't all that gung-ho over UA. Only six of the 28 analysts who track the company recommend buying the stock. Five analysts rate it a sell and the other 17 are neutral on the stock. Even so, some large institutional investors are high on UA, including BlackRock, which owns a total stake of more than 5% in two of its funds. Vanguard Group owns 3.75% and Franklin Resources holds a 3.40% stake.

Not many sports-related stocks are as widely known and respected as Nike, but UA has the potential to and wherewithal to aspire to be next to the leader. So for investors looking to find a relatively new name in the arena, Under Armour would be a good bet.