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Tuesday, August 22, 2006

What Are The Chances of an Under Armour Buyout?

This isn't your grandparent's polyester, but a buyout at the price today or at a premium would be a hefty price tag. This is a great company, but it would probably be cheaper to partner with the company than it would to forcefully buy them out. Outside of a huge insider holding, there appears to be some provisions making a deal difficult to do without management's blessing.

Today shares of Under Armour (UARM) are up over 2% to $35.75 on what is being tossed around as "rumors of a deal." The company has been deemed more valuable since they signed an NFL deal earlier this month and signed more distribution deals; but the company now has a market cap of about $1.7 Billion, it has a 71 trailing P/E ratio, trades at 51-times 2006 earnings, and trades at about 40-times 2007 earnings. In truth, if Nike (NKE) or Reebok (part of Adidas) really want to do something then they won't care about the multiples. Just to be fair to the company: as UARM has exceeded earnings targets, those multiples may be conservative and maybe even under-stated.

BUT.......If Nike or Adidas or another apparel beast just now decided that there is value when they could have picked this up around the IPO or even tried before, then these management teams should be punished and punished severely for having their heads somewhere other than just in the ground for this long. In truth, Under Armour is probably comparable to an extreme business model of Nike's Dri-Fit(tm) or of Reebok's Premier Tech(TM). There is absolutely nothing wrong with the company as far as anything that is known, and it is a solid brand name in the US. There are doubts on how well the company will do in Europe, but that is a story I don't even want to get into.

The insiders already sold a slew of shares back in May at $34.00 minus fees, so they already got at least the first part of their reward and quasi-dynasty money. The company has also not been able to get back above the $40 mark it saw before they had earnings issues in February. That $40+ mark was also just in July, so any deal would have to be at a solid premium to today's mid-$30's stock price.

The IPO never did see this level in the open market, but they priced the IPO at $13.00 last November and that was above an already-raised range. If Nike or Reebok just now have decided that this could help them in the market share of a Dri-Fit(tm) or Premier Tech(tm) for moisture and heat management sportswear, well we already said it enough.

There is a long-shot scenario, although it would probably be a dream scenario. For someone to buy this company, they would need to do a deal with management and not pursue this as hostile. That way they could structure this with earn-outs and with performance clauses. Management at the company is also young, very young. UARM stock trades at a monster multiple of about 10-times its real net book value. Insiders still hold a substantial amount of the stock.

This is a solid brand with a solid position and still has room to grow market share on its own. Nothing said in here is really meant to be negative on UARM, even though the valuations would make a buyout seem unlikely. Now if this company ever takes a serious hit on its stock because of a performance hit in the near future, THEN maybe the management at Nike or Adidas shouldn't be punished if they wanted to step in and do a deal. Unfortunately it looks like outsiders may have missed their window for now.

Under Armour is a solid brand name, and that isn't the issue here. The company is NOT a member of our proprietary BAIT SHOP because of valuations and because of the age of management that controls such a large portion of stock, among other reasons.

Jon C. Ogg
August 22, 2006

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