Forget Nike: Get 30% Upside With This Apparel 'Startup' Instead

By: Marshall Hargrave of Street Authority

Technology is all around us and in everything: our homes, cars, offices -- and even in our clothing.

Apparel companies are looking more and more like technology companies these days. Wearable technology has become one of the fastest-growing markets over the past year, with apparel companies pushing the limits on recording our physical activity and then transforming it into useful data.

One of the fastest-growing and most innovative companies in the apparel space, Under Armour (NYSE: UA) is at the forefront of this trend. Under Armour has the insight of real-life athletes, the look of an apparel company and the feel of a tech company.

Under Armour's products are sold to a number of teams and athletes, from colleges to the pros. The company's founder, Kevin Plank, came up with the idea of performance apparel during the mid-1990s as the special teams captain of the University of Maryland football team.

When you look under the hood, Under Armour operates a little like a tech startup, hosting contests to improve its products and hiring more developers to build and improve their technology. And even though Under Armour has a well-recognized brand by now, it's still a growth story.

Its market cap is $8.9 billion, a small fraction of Nike's (NYSE: NKE) $69 billion. But in addition to the growing market for wearable apparel, Under Armour still has a huge growth opportunity overseas, seeing as almost 95% of its revenue comes from North America.

Flickr/Rob Stinnett

Apparel is still the company's chief revenue generator, accounting for nearly 80% of sales. During the third quarter, footwear revenue was up 28% from a year ago.

Another large part of Under Armour's growth plans is the rise of health consciousness as more people pursue active lifestyles. As a result, Under Armour is also looking to target more individual consumers (as opposed to athletes and teams), so it's investing in direct-to-consumer business lines such as retail stores (it now has more than 100 outlet stores) and e-commerce. It also still has a large market to tap when it comes to gaining shelf space in department stores.

Apparel is still the company's chief revenue generator, accounting for nearly 80% of sales. However, Under Armour has a big opportunity to penetrate other areas of the clothing industry, including footwear, which only makes up 11% of revenue. Its latest innovations in footwear include SpeedForm, a shoe designed for avid runners. During the third quarter, footwear revenue was up 28% from a year ago.

One of Under Armour's most appealing traits is its steady flow of products. One of the company's latest products is Armour39, which consists of a wearable chest strap that records heart rate and calories burned. It has also introduced Studio and Armour Bra, two new lines for women. Women's apparel is one of the key areas in which Under Armour hopes to further establish itself, considering that women's products account for only 22% of its revenue.

Under Armour also recently snatched up MapMyFitness, which has over 20 million registered users and should give Under Armour a head start in the relatively new apparel tech sector.

With an enterprise value-to-sales multiple of 3.9, Under Armour's valuation looks expensive. However, the company has negligible debt and is expected to increase earnings per share by nearly 22% annualized over the next five years. Under Armour's valuation compares favorably with another trendy apparel company, Lululemon (Nasdaq: LULU), which is trading at an EV/sales ratio of 6.3.

Risks to Consider: The wearable tech industry could well continue to attract competition, which means that Under Armour might not grow as fast as expected. The other big risk is that Under Armour's products might not be well received outside of North America.

Action to Take -- With Under Armour's growth prospects, UA could rise to $107 by the end of 2014 with a multiple expansion to 4 times EV/sales, representing 30% upside from its current price.

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