MorningWord 12/23/15: Sizing Up Growth Premiums $UA $NKE

by Dan December 23, 2015 10:22 am • Commentary

Last night on CNBC’s Fast Money we had a short little debate on how to properly assign an earnings multiple to a once highflying growth darling like Chipolte (CMG), once disaster hits.  As I detailed in a post yesterday (CMG: An Enigma Wrapped in a Tortilla), the uncertainty around how and when the company will halt the cases of E.coli and the lasting impact from a consumer confidence standpoint is unquantifiable:

Even with the stock’s 35% decline from its highs, the stock still trades at 30x expected 2016 earnings that analysts now see growing at only 7%, its lowest earnings growth since 2007.

Prior to the stock’s sharp decline in mid October, when it was within a few percent of all time highs, investors overlooked the stock’s premium valuation in favor of the company’s superior growth to peers.  But now your guess is as good as mine for an appropriate multiple when the news flow is so uncertain. It’s a tough comparison vs the behemoth in the space, McDonald’s (MCD) which trades 24x trailing earnings, expected $25 billion in sales and $108 billion market cap, vs CMG with $4.5 billion in expected sales and a $15 billion (and falling) market cap.

NKE vs UA:

Another stock that we spoke of last night that trades at a premium valuation to most of its peers is Nike (NKE). Last night the company reported better than expected fiscal Q2 results, buoyed by strong sales in China.  This morning NKE  is trading at a new all time high, and now about 32x expected fiscal 2016 earnings, almost 2x its expected 16% growth rate.  NKE’s P/E on a a current basis is at a 10 year high, and almost 40% above its five year average:

From Bloomberg
From Bloomberg

It would be fairly easy to make the case that the stock is priced for perfection, but you could have made that same assertion at any point this year as the stock gapped to new highs following its last three earnings reports:

NKE 1yr chart with earnings events marked from Bloomberg
NKE 1yr chart with earnings events marked from Bloomberg

And that leads me to Under Armour (UA). Much like CMG, UA is a high growth darling taking on a massive incumbent, and assigned a massive valuation (even compared to NKE’s rich valuation.)  UA trades nearly 80x 2015 earnings, and 60x expected, nearly 2x that of NKE’s forward earnings multiple.  Much like the comparison above between MCD and CMG, NKE is a $113 billion market cap, with $32 billion in sales vs UA with a $17 billion market cap with an expected $4 billion in sales.  Like CMG, UA has also had a sharp decline from its all time highs made earlier this fall, but not for any specific reason like their shoes causing a foot fungus, but more to do with this year’s slowdown in earnings growth, the first year below 19% (expected 10%, down from 27% last year) since 2008).  But sales are expected to grow about 27% this year and 25% next.  If the earnings dip is simply a result of higher market costs associated with signing future sports legends like Steph Curry and Jordan Spieth, the exposure is sure to help them go into new markets like China next year. And if successful the stock could actually grow into its valuation.  UA currently gets less than 10% of its sales from outside North America.  Just this morning I read a stat in Barron’s that is staggering:

About 100 million people in China follow the NBA. Even if only 20% of them play basketball, it is a vast market with 20 million consumers. In the most recent quarter, Nike said its footwear sales in China gained 30% to $600 million, while apparel revenue climbed 15% to $306 million.

UA is poised to make massive inroads in China with their long term sponsorship of Steph Curry, the NBA’s reigning MVP and World Champion who just this season helped his team the Golden State Warriors start the year 24 and ZERO.

Again, I have no idea where UA stops going down, but the situation is far different than that of CMG.  The one year chart below shows just how important the $80 level is, and I suspect for those that think the next year could be the year UA shows the world what they have done so successfully in the U.S., than dollar cost averaging could be the only way to consider legging into a long position:

UA 1yr chart from Bloomberg
UA 1yr chart from Bloomberg

One way to do this might be to routinely sell out of the money puts, taking in premium, and at some point at the right price being put the stock.  Trying to catch a falling knife is tricky business when it comes to investing, but you greatly increase your odds of success when you are getting paid to do so, rather than the other way around trying catch the turn with long calls.