Wednesday, January 31, 2007

Calls of Note Part 1

- Morgan Stanley is out on Under Armour (NYSE:UA) noting that in their first three months of coverage, they've grown incrementally more constructive on UA. They still firmly think that gross margins will begin to come under pressure over the next 12 months.

But where they're more positive is how far ahead UA is as it relates to SG&A investment and infrastructure-build compared to other early cycle hyper growth stories. Firm now thinks it will have more cost levers to pull to maintain margins in the event of GM pressure than they previously assumed. That said, firm's sense is that a 55x p/e multiple is perhaps plausible when earnings are driven by sales + GM upside, but this multiple gets to be a stretch when the story turns into sales + SG&A leverage. Their $33 target (based on dcf model with UA following the path of an early stage Nike) is arguably low in light of potential for better SG&A leverage, which they will revisit after Thursday's earnings

The last 2 quarters UA beat EPS by nearly a third and the stock went down on both days. Four quarters ago UA beat by only 3% and the stock lost 23% in a day (off of a much lower valuation
base). Clearly, the company needs to beat meaningfully to avoid going down. Firm's sense is that UARM needs to beat a $0.30 number versus the Street at $0.25 -- which they think is entirely possible this quarter.

Maintains Underweight.

Notablecalls: Not actionable but good to know category. Shows you where the expectations stand.

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