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An Undervalued Global Athletic Brand With a Growing Moat

R.J. Hottovy, CFA

Under Armour has evolved into a global athletic brand spanning performance apparel, footwear, and accessories, and we think its competitive advantage is strong and growing.

We assign the firm a narrow moat. The company possesses an intangible asset in a brand with a reputation for performance and innovation. We believe consumers will continue to pay a premium for the Under Armour label, and retailers will continue to support the brand for the traffic and margins it generates. Recent and ongoing sponsorship deals--including with Major League Baseball--give us high confidence that the Under Armour brand will be sought after for at least the next five to 10 years.

Under Armour has been able to turn in sustained margin improvement and impressive return on capital as it has rapidly expanded. That track record, along with the sizable potential in their Connected Fitness business and signs the brand is getting even stronger, lead us to give the firm a positive moat trend rating.

Shares have been under pressure this year, falling more than 30% year to date, as 2017 has shaped up to be a transition and investment year for Under Armour. Management didn't accurately forecast the level of investment needed for certain growth and infrastructure initiatives, but we believe that the company's restructuring will support long-term growth.

Results are likely to be choppy in the near term, but with nonvoting C shares trading at a more than 30% discount to our fair value estimate and A shares trading at a 25% discount, we see value here for long-term investors.