Under Armour (UA) reports their Q4 results after the close, the options market is implying about a 7% one day move in either direction vs the 4 qtr avg of about 12%. The implied move looks fair when you consider the potential for lack of movement like last quarter when the stock opened down close to 10% and closed down less than 3%.
As we get to the back half of the Q4 earnings period I think it is safe to say that the push and pull of the strong dollar for exporters, vs the benefit of lower oil for those with little overseas exposure have been the two massive themes. For those who get at least half of their sales from overseas, the strength of the dollar has outweighed lower oil at the pump for American consumers, see CAT, MSFT and PG. While those with little overseas dollar exposure where their consumers have more cash to spend have seen blowout results like DIS & KSS this week and SBUX a bit ago.
UA falls in the latter group, with 95% of their sales from North America. While a lot of their future growth is expected from new markets overseas, the company is also committed to pushing into fast growing categories like shoes (growing 42% last few qtrs, making up 15% of total sales) where they recently tried to make a blockbuster deal to sign Kevin Durant (but he was re-signed by Nike) and hired a 25 year veteran of NKE to run footwear.
The obvious issue with the stock is valuation, trades at 60x 2015 expected earnings growth of 26% (which is flat year over year) on 24% sales growth (expected to decelerate from 30% in 2014). The stock is priced for perfection, much like Chipolte (CMG) heading into last night’s results (stock down 6% today).
Sentiment on the stock is not as hot as its valuation, as analysts are fairly mixed, with 17 Buy ratings, 16 Holds and 4 Sells, with short interest at about 7.5%,.
From a technical standpoint its pretty simple, the stock either gets rejected at the prior highs from September, or we see an attempt at an epic breakout to new all time highs like we are seeing today in DIS:
Here is a stock that I see no need to be contrarian for the sake of it, especially when you consider how the stock moves post earnings. A beat and raise sends the stock up 10% in a quick. And who knows where it stops? Just look at the then breakout back in July.
If I were willing to define my risk and play for the breakout I would likely look to an out of the money call spread like the Feb6th weekly 74/80 call spread for about 1.20, risking 1.20 to possibly make up to 4.80 if the stock is 80 or higher in line with the implied move. This is obviously a pretty tricky trade as past performance is no indication of how a stock will move in the future. For instance last qtr the stock declined 2.6%, making most short dated long premium trades in either direction instant losers. Playing binary events like earnings with short dated long premium options trade structures is a hard way to make money consistently as you need to get the direction, timing and magnitude of the move right just to break-even.
Oh and for longs who have just watched the stock rally from $64 in mid January, the Feb6th weekly 65 puts offered at .35 (stock ref $72.60) seem like a dollar cheap way to protect against a disaster scenario.