Call Options Or Put Options On Under Armour (UA)?
Under Armour (UA) designs, develops, markets, and distributes for men, women, and youth worldwide.
The company was founded in 1996 and is headquartered in Baltimore, Maryland.
UA started by creating an entirely new type of athletic apparel. They call it performance apparel. It’s designed to provide compression and wick perspiration off your skin rather than absorb it.
Today, the company offers a wide array of athletic apparel, footwear, and accessories.
UA currently trades for $96 per share. It’s up more than 78% from the 52-week low of $52.62. But it’s recently fallen 13% from its 52-week of $107.86.
Is this an opportunity to buy call options on UA as it soars to new highs? Or should you buy put options on Under Armour as it pulls back?
The bulls make a convincing argument…
Under Armour’s sweat repelling line of athletic wear is a huge hit with athletes.
Sales have grown at nearly 28% per year over the last five years. And EPS have averaged more than 21% growth per year over the same time frame.
This year they’re expected to grow revenue 21%-22%. And EPS are expected to grow an eye-popping 38% this year and 28% the following year.
Simply put, UA is an amazing growth story. And there’s still plenty of room for UA’s revenue and earnings to surprise to the upside.
The better than expected performance will be driven by expanding the number of stores that are selling their products as well as expanding other in-store sales concepts that have been successful on a more limited basis.
As these new marketing strategies ramp up to full speed they should send revenue and earnings growth well beyond current expectations. And that’s the type of thing to fuel more upside in the stock price.
But the bears have a compelling case as well…
UA has carved out a nice niche market. But in order to start playing with the big boys of athletic apparel, like Nike (NKE), they need to break into the footwear market.
And despite a massive marketing campaign to promote their footwear, UA footwear hasn’t gained much traction with the consumer.
Until UA can make in-roads into the ultra-competitive athletic shoe arena, the stock has limited upside. And at this point, UA hasn’t been able to figure out the secret to growing their athletic shoe sales.
Simply put, UA can’t continue growing revenue and earnings per share at more than 20% per year without a dominant athletic shoe business. And right now they’re nowhere close.
What’s more, UA stock has benefited from an interesting trade over the last few months.
Traders have been buying stocks with the majority of their revenue coming from domestic sales. And at the same time, they were shorting the stocks of multi-nationals in the same industry with exposure to Europe and Asia.
They did this because they saw the US as the strongest economy. And companies selling almost exclusively to American consumers were likely to outperform those with huge exposure to slowing consumer spending in Europe and Asia.
This pair trade in the athletic apparel industry was done with UA and NKE. Only 6% of UA’s sales are international while 57% of NKE’s sales come from outside the US.
This has been a great trade in the second quarter. But if traders unwind these positions, it could send shares of UA down sharply in the next month.
If you think the bulls are right, take a look at buying the UA August 2012 $105 Call for around $2.45.
If you think the bears are right, take a look at buying the UA August 2012 $85 Put for around $3.00.
Good Investing,
Corey Williams
Category: Call Or Put Options?
