DCF Under Armour - Grade: A PDF

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DCF Under Armour - Grade: A...

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Introduction The purpose of this report is to use a discounted cash flow valuation for Under Armour (UA), The Discounted Cash Flow (DCF) Valuation uses estimated future free cash flows, which are discounted with a discount rate to the present value (Damodaran). According to Larrabbe and Voss, the DCF valuation approach is theoretically the most correct valuation approach. For an action to create value Under Armour would have to; Increase the cash flows generated by existing investments, increase the expected growth rate in earnings while generating excess returns increase the length of the high growth period, or reduce the cost of capital that is applied to discount the cash flows. (Damodaran) It is also important to note that stock splits do not affect the DCF. Under Armour did a two-for-one stock split in Mid 2016. Furthermore Under Armour typically does not pay dividends and reinvests profits back into the company. Because Under Armour typically does not pay dividends the DCF Valuation is more practical than a Discount Dividend Model. The analysis for this report was created by using ValuePro.net, an online calculator that prepares DCF valuations. ValuePro uses inputs from SEC EDGAR data and implements the data into a four step process that includes; forecasting expected cash flow, estimating the discount rate, calculating the value of the corporation, and calculating the intrinsic stock value. (ValuePro) For this analysis there will be three values in comparison, the first assumed intrinsic value of UA created by ValuePro, the second value is an intrinsic value of UA created by ValuePro using assumptions with changed variables, and the current market price of UA. The reader will be able to make an educated decision of Under Armour’s Value by comparing the multiple values that have been produced.

Analysis The following analysis will provide an explanation of what values were used to create the intrinsic values of Under Armour.

Default ValuePro Valuation The default ValuePro findings will be presented first:

It is important to note that the intrinsic value that the default ValuePro calculator created came to 64.95. This means that using the default ValuePro calculation, the current value of Under Armour is nearly 3 times under valued based on the current stock price of $20.08 (Yahoo Finance). A good sign for a potential investor as the calculations suggest Under Armour is very

undervalued. However, the default values used by ValuePro need to be adjusted to create a more accurate value. The following section will provide an adjusted valuation accompanied by a table to explain the changes.

Adjusted ValuePro Valuation As mentioned the DCF valuation needed to be adjusted to get a more accurate valuation. Below are the adjusted calculations used along with an accompanying table explaining the changes.

The adjusted assumptions of the ValuePro DCF calculator suggest Under Armour should be valued at $46.19 which is still nearly 2.5 times the current value of $20.08. This can be explained by Under Armour’s philosophy of limiting their dividend payouts and reinvesting their profit into the long term growth of the company.

Principal Assumptions Below are the principal assumptions used in the DCF valuation by Value Pro. All items calculated in the “Your Assumptions” are from Under Armour’s most recent 10-k Statement unless otherwise noted.

Excess Return

ValuePro.ne t Assumption s

Your Assumptio ns

10

10

Explain the Reasoning for Your Assumptions

A 10 year excess return period was used

Period (Years)

as an estimated term Under Armour could

(10 years is

create abnormally high rates of return.

appropriate) Revenues ($ mil)

1922.1

4976.553

(From Income

The revenue was changed to the last year end statement report of annual revenue.

Statement) Growth Rate (%)

22

3

The growth rate was changed to 3% to

(Estimated

keep in line with the terminal value of the

Annual Growth

economy.

Rate in Earnings in Future) Net Operating

11.09

3.05

Calculated by taking UA net operating

Profit Margin (%)

income divided by Operating Revenue

(EBIT from

(27.84/9.12)

Income Statement) Tax Rate (%) (From Income Statement:

36.699

36.699

Tax Rate for UA based on 10-K statement

Taxes / Earnings Before Taxes) Stock Price ($)

17.48

20.08

(Current Price

Current stock price is $20.08 (Yahoo Finance)

per Share) Shares of Stock

105.1

442.08

Outstanding

The amount of shares outstanding based on 2017 10-K statement

(mil.) (Be careful with decimal) 10 Yr. Treasury

5

3.05

10 Yr Treasury Yield is 3.05 (Treasury.gov)

1.5

1.5

The default value of bond treasury %,

Bond Yield (%) Bond Spread to Treasury (%)

Interest rate spread that the debt of the

(1.5 is

company would have in excess of the

appropriate)

interest rate on the 10-year Treasury Bond (Value Pro)

Preferred Stock

7.5

7.5

The default value of the ValuePro calculator

2.35

6.21

The Depreciation rate as a percentage of

Yield (%) Depreciation Rate (%)

revenue is calculated by dividing the Annual

(Percentage of

Depreciation Amount by the Annual

Revenue;

Operating Revenue

Calculate)

(56.68/9.12)

Investment Rate

2.76

-10.10

The Investment Rate as a percentage of

(%) (Percentage

revenue is calculated by dividing Annual

of Revenue for

Capital Expenditures by Operating Revenue

Capital

(-281.34/9.12)

Expenditures Calculate) Working Capital

19.13

43.35

Working Capital as a percentage of

(%) (Percentage

revenue is calculated as follows: [(Accounts

of Revenue –

Receivable Inventories)-Accounts

WC is Current

Payable] / Operating Revenue

Assets;

[(609.67+1158.55)-409.68]/9.12

Calculate) Short Term

887.74

2337.68

Assets ($ mil.)

Under Armour has current assets of $2,237.68 (Gurufocus)

(Current Assets from Balance Sheet) Short-Term

1193.3

1060.38

Liabilities ($ mil.)

Under Armour has short term liabilities of $1060.38 (Gurufocus)

(Current Liabilities from Balance Sheet) Equity Risk

3

5

The equity risk premium for the scope of

Premium %

this analysis is assumed to be 5%. This is

(Should be

based on historical equity risk premiums of

between 5% and

5-6% (Damodaran, 2012).

6%)

Company Beta

1.26

-.43

Under Armour has a beta of -.43 (Yahoo

for Stock

Finance) according to Damodaran a

(Number) (Look

negative beta has no positive or negative

up Beta)

affect to a portfolio.

Value (Book) of

51.7

917.05

Under Armour has a book value of debt

Debt

$917.05 based on calculations from the

Outstanding ($

company's most recent 10-k

mil.) (L-T + S-T Debt from Balance Sheet)

Value Preferred

0

0

Stock

Under Armour has no prefered stock outstanding

Outstanding ($ mil) Company WACC

8.65

1.09

WACC is automatically calculated using

(%) (Look up or

ValuePro’s calculator the formula used is

Calculate)

Weight Equity * Cost of Equity + Weight Debt * Cost of Debt * (1- Tax Rate).

Findings The analysis above suggests the following values Default Value

Updated Value

Current Price

$65.95

$46.19

$20.08

The data suggests that Under Armour is undervalued. The intrinsic value created by the default value is 3x higher than the current stock price of Under Armour, this can be largely attributed to an estimated growth rate of 22% over the 10 year term. The issue with that growth rate and time period is the sustainability to the company. It would be very difficult for Under Armour to maintain that growth rate therefore the default value generated by ValuePro is not likely. The updated value generated by ValuePro suggests a more appropriate intrinsic value. The major differences was an updated growth percentage from 22% to 3% and a decrease in WACC from 8.65 to 1.09. The two values correlate with each other as a high growth percentage would generally mean more risk is involved. Even though Under Armour is considered a growth company as they do not typically pay out dividends investors would be glad to see that their WACC is not high.

Conclusion After comparing multiple values for Under Armour it appears the company is undervalued. Since the DCF is a valuation of future cash flows this could seem as excellent news to both the company and investors. Under Armour had a poor year resulting in negative net income. However the company has stated the focus is on long term growth, doubled down with purchases of more warehouse space and inventory. The results of the DCF would suggests the investment of long term growth has propelled Under Armour’s value to nearly 2.5 times the current stock price. By using the help of the DCF valuation an investor could determine a long term investment strategy.

References Damodaran, Aswath. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Third Edition. John Wiley & Sons. © 2012. Books24x7. Larrabee, David T., and Jason A. Voss. "Chapter 5 - Discounted-Cash-Flow Approach to Valuation". Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options. John Wiley & Sons. © 2013. Books24x7.

References (n.d.). Retrieved from https://www.gurufocus.com/stock/UA (n.d.). Retrieved from https://www.sec.gov/Archives/edgar/data/1336917/000133691718000009/ua20171231x10k.htm (n.d.). Retrieved from http://www.valuepro.net/approach/dcftech/dcftech.shtml

UA : Summary for Under Armour, Inc. Class C. (2018, November 23). Retrieved from https://finance.yahoo.com/quote/UA/ U.S. Department of the Treasury. (n.d.). Retrieved from https://www.treasury.gov/resource-center/datachart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018...