Under Armour Technical Analysis PDF

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Under Armour Technical Analysis grade a...

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Introduction The purpose of this analysis is to define technical analysis and how it correlates to the market price of Under Armour (UA). Technical Analysis “is the forecasting of future financial price movements based on an examination of past price movements.” (Chart School) There are many different ways to use technical analysis to anticipate a price movement. Throughout the course of this technical analysis the reader will understand how a 200 Day Moving Average, Moving Average Convergence Divergence (MACD), Commodity Channel Index (CCI), Relative Strength Index (RSI), Rate of Change, and Money Flow Index influences the market price of Under Armour’s stock price. Furthermore the analysis will include an Enterprise Value Model. The purpose of the Enterprise Value Model is to measure a company’s total value. The Enterprise Value Model includes common stock outstanding, recent share price, total debt, total liquidity, earnings before interest, tax, depreciation, and amortization (EBITDA), net income, and long-term growth. The Enterprise Value Model incorporates averages of Under Armour and direct competitors to compare enterprise values. This will help potential investors make a determination as to Under Armour being a sound investment. Under Armour will be compared Nike (NKE), Lululemon (LULU), Sketchers (SKX), and VF Corporation (VFC) (The parent company of The North Face, Timberland, Vans, Wrangler, among others). These companies were chose as competitors because of direct similarities in footwear and apparel. One large competitor, Adidas, was not included because the

company does not trade in the United States. Data was retrieved by using the following websites: gurufocus.com, Nasdaq.com, and chartschool.com

Analysis Section The analysis section will provide examples and definitions of the following technical analysis: 200-Day Moving Average (DMA), Moving Average Convergence Divergence (MACD), Commodity Channel Index (CCI), Relative Strength Index (RSI), Rate of Change, and Money Flow Index. There is no one better technical analysis tool than the other so the focus will be on the six mentioned above. It is up to the analyst to determine the best technical analyst that suits their research. Technical Analysis

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200-Day Moving Average: Moving Averages are a useful technical analysis tool because the moving average defines the current direction, it also defines potential support or resistance levels. Moving averages are preferred because it is a lagging indicator that filters out noise of a trading day. There are many different time frames to calculate a moving average, and the calculation is quite simple. To find the moving average the daily closing prices are added and then divided by the number of days. For example a 5 day moving average is calculated by adding (20+21+22+23+24)/5 = 22. As the days move on the beginning number is replaced with the most recent closed day price. In this analysis the 200-Day Moving Average is being used. The 200-Day Moving Average is seen as a medium/long term investment technical analysis tool because of the length of the days used. “Moving averages can also be used to generate signals with simple price crossovers. A bullish signal is generated when prices move above the moving average. A bearish signal is generated when prices move below the moving average.” (Chart School) By looking at Under Armour’s stock price chart using the 200 Day Moving Average an analyst would see two things; one being a decrease in stock price and another being an increase in stock price. Going further back towards the middle of the year around May the stock price went above the 200 DMA and continued to climb until October where the lines crossed and the price dropped. The below graph seems to agree with what the 200 DMA explains, when prices go above the line they increase and when prices go under the line

they decrease.

Figure 1: Shows the 200 DMA of Under Armour

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MACD: The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. (Chart School) MACD is used to gauge momentum; by looking at the 12 day Exponential Moving Average (EMA) and the 26-day EMA will determined which way the momentum is going. When the 12-day EMA trades

below the 26 day EMA downside momentum is increasing. On the other end when the 12 day EMA trades above the 26 day EMA upside momentum increases. Looking at the graph for Under Armour an analyst would see a consistent battle for upside and downside momentum. However it is important to note that when looking at UA’s MACD the trend seems to create higher lows which suggests upside momentum. Looking at October 29th the signal line crosses the MACD line, which suggests a bullish divergence. The stock price confirms this by jumping from $17 to $21.

Figure 2 Shows Under Armour's MACD graph

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Commodity Channel Index (CCI): CCI is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. CCI was originally developed

to identify cyclical turns in commodities, but can also be applied to other indices. Furthermore CCI is used to identify when there are overbought or oversold levels. The calculation of CCI, per Chart School is CCI = (Typical Price - 20-period SMA of Typical Price) / (.015 x Mean Deviation) CCI measures the difference between a security’s price change and its average price change. When there are high positive readings that indicates price are well above their average, +100 on the chart. And the opposite is true as well, where low negative readings represent a weakness, -100 on the chart. It is important to note that CCI has no limits, meaning the security price can continue to climb higher even though the security is over bought or continue to go lower even though the security is oversold. Under Armour’s chart agree with the trend CCI creates. Looking from July to August, Under Armour’s CCI falls under -100 suggesting it is oversold. However since there is no limit to CCI it falls to -200 suggesting that although UA is oversold the CCI shoots lower than the undersold amount.

Figure 3: Shows Under Armour's CCI

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Relative Strength Index (RSI): RSI is a momentum indicator that measures the speed and change of price movements. RSI is calculated using the following formula: 100 RSI = 100 - -------1 + RS where RS = Average Gain / Average Loss RSI is traditionally used during a 14-day period, and considered to be overbought above 70 and oversold below 30 (RSI is an oscillator that ranges from 0-100 regardless of positive or negative value). Much like CSI, even when a security is considered overbought or oversold the security can continue to climb higher or lower. The technical analysis of RSI in relation to Under Armour shows an interesting trend. In June the stock was oversold and then subsequently dropped in price where RSI also dropped under 70 (overbought level). What is also interesting to note there were three instances where RSI bottomed at the 30 level and then followed with a steady gain to the mid 50 level where it declined again

to the 30 level. Currently UA is at a 67.82 level according to RSI that means the price of Under Armour is near the overbought level, which could suggest a decline back to the 30 levels

Figure 4 Shows the RSI of Under Armour

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Rate of Change (ROC) or Momentum: Is a pure momentum oscillator that measures the percent change in price from one period to the next. “The ROC calculation compares the current price with the price “n” periods ago. The plot forms an oscillator that fluctuates above and below the zero line as the Rate-ofChange moves from positive to negative.” (Chart School) With ROC, securities can only decline, and only decline to 100, meaning 100%, which would be zero. What is important to note is when ROC remains positive there is a price increase and when ROC remains negative there is price decrease. This is important to remember because it can help represent the trend of a security. Looking at Under Armour’s ROC it shows a couple different trends. Looking at the 250 day ROC Under Armour had very few negative ROC points, and less aggressive drops than the 21 or 63 ROC. This suggests that over the last 250 days Under Armour has not had tremendous swings in stock price. Over that time it shows the price ranging from $16-$21 with the low being at the end of October and the high being current. So one could argue before the last two weeks there has not been a tremendous rate of change or change in momentum in Under Armour’s stock.

Figure 5 Shows the ROC of Under Armour

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Money Flow Index (MFI): “Is an oscillator that uses both price and volume to measure buying and selling pressure.” (Chart School) Money Flow is positive when the determined typical price of the period rises and negative when the typical price declines. These instances are known as buying pressure and selling pressure. The following steps complete the calculation of MFI: Typical Price = (High + Low + Close)/3 Raw Money Flow = Typical Price x Volume Money Flow Ratio = (14-period Positive Money Flow)/(14-period Negative Money Flow) Money Flow Index = 100 - 100/(1 + Money Flow Ratio)

There are three basic buying signals associated with MFI, overbought oversold levels, bullish and bearish divergence, and failure swings a 80 or 20 can identify potential price reversals. Looking at Under Armour’s chart in June there is a decrease in stock price in correlation to MFI. MFI is considered overbought at 86 there is still a positive volume of trades from 5 million to 10 million. However after the high volume of trades MFI dipped under 80 volumes dropped for the first time in a couple periods. The stock price followed this and started a trend dropping from $22 to around $17 in September. Following the drop in September volume picked up on September 20th, which started a trend up.

Figure 6 Shows Under Armour's MFI

Enterprise Value and PEG The calculations to the Enterprise Value and PEG analysis can be seen in the Excel Sheet “TerribileEnterpriseValuePEGModel”. The Enterprise Value of a firm is the price someone would pay for the company today. It also considers debt and cash as opposed to market capitalization that only considers the current share price and shares outstanding (Damodaran, 2012). PEG ratio, takes the P/E ratio and combines it with the company's expected earnings growth, in order to better express the valuation of growing companies. (The Motley Fool)

Below is a copy from the excel sheet that shows the data for Enterprise Value and PEG ratio. Results are in millions

Figure 7: Enterprise Value and PEG Ratio

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Market Capitalization is calculated by multiplying the shares outstanding by the current stock price.

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Enterprise Value is calculated by adding market capitalization total debt and subtracting total cash and liquid investments

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EV/EBITDA Ratio is calculated by dividing Enterprise Value by EBITDA

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P/E Ratio is calculated by diving Market Capitalization by Net Income

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PEG Ratio is calculated by dividing the P/E Ratio by Long Term Growth Rate multiplied by 100

In this analysis Under Armour will be compared Nike (NKE), Lululemon (LULU), Sketchers (SKX), and VF Corporation (VFC) (The parent company of The North Face, Timberland, Vans, Wrangler, among others). These companies are all that sell footwear and apparel and are strong competitors of each other. After completing the analysis to determine Enterprise Value Under Armour has an enterprise value of $10,031.8 this is three, and almost four times lower than the average Enterprise Value of $38,625.3. This means Under Armour is cheaper to buy than its competitors outside of Sketchers. Nike creates an outlier in the data since Nike’s Enterprise Value is $124,374.6. Moreover with Nike removed from the equation Under Armour’s Enterprise Value is still over $3,000 less than the average. Again, Under Armour would still be one of the lesser expensive companies to buy. The EV/EBITDA Ratio takes the Enterprise Value one step further by introducing earnings before interest,

taxes, depreciation and amortization. This ratio is important to determine what multiple a company is currently trading at, but more importantly to see where a company is trading at in comparison to direct competitors. In this model Under Armour has an EV/EBITDA of 30.81 compared to the average of 22.73. Comparing Under Armour to the average would suggest that Under Armour is being over valued. One could make the argument that Under Armour is over valued because while the company is growing, debt is being used to fuel that growth. This could be due to Under Armour expanding in hopes it returns future profits. However the latter is an assumption and going based on what is presented in the EV/EBITDA model Under Armour appears to be over valued in comparison to direct competitors.

Conclusion After conducting multiple technical analysis and an Enterprise Value model Under Armour appears to be an over valued stock compared to direct competitors. Under Armour is nearly one and a half times more valued based on the EV/EBITDA ratio. Based on a relative valuation Under Armour does not appear to be the strongest investment in the footwear and apparel segment. However using technical analysis could garner better results for an analyst. Under Armour appears to follow trends based on technical analysis. Using momentum, leading or lagging indicators, oscillators, divergences, and crossovers among others an analyst can forecast future stock prices of Under Armour to reach a profit. It is important to note that there are many technical analysis tools, and many financial ratios to use to determine whether or not a company is a sound investment. It is important to do all due diligence when investing.

References “Commodity Channel Index (CCI).” StockCharts.com, 19 Sept. 2017, stockcharts.com/school/doku.php? id=chart_school:technical_indicators:commodity_channel_index_cci. Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining

the

Value of Any Asset, Third Edition. John Wiley & Sons “Lululemon Athletica Inc. Common Stock (LULU).” NASDAQ.com, www.nasdaq.com/symbol/lulu/. “MACD (Moving Average Convergence/Divergence Oscillator).” StockCharts.com, 19 Sept. 2017, stockcharts.com/school/doku.php? id=chart_school:technical_indicators:moving_average_convergence_divergence_macd. “Money Flow Index (MFI).” StockCharts.com, 13 Nov. 2017, stockcharts.com/school/doku.php? id=chart_school:technical_indicators:money_flow_index_mfi. “Moving Averages - Simple and Exponential.” StockCharts.com, 13 Nov. 2017, stockcharts.com/school/doku.php? id=chart_school:technical_indicators:moving_averages. “Nike, Inc. Common Stock (NKE).” NASDAQ.com, www.nasdaq.com/symbol/nke/. “Rate of Change (ROC).” StockCharts.com, 9 Oct. 2017, stockcharts.com/school/doku.php? id=chart_school:technical_indicators:rate_of_change_roc_and_momentum. “Relative Strength Index (RSI).” StockCharts.com, 9 Oct. 2017, stockcharts.com/school/doku.php? id=chart_school:technical_indicators:relative_strength_index_rsi.

“Skechers U.S.A., Inc. Common Stock (SKX).” NASDAQ.com, www.nasdaq.com/symbol/skx. Staff, Motley Fool. “What Is the PEG Ratio?” The Motley Fool, The Motley Fool, 14 Mar. 2016, www.fool.com/knowledge-center/peg-ratio.aspx. “UA - Under Armour, Inc.” StockCharts.com, stockcharts.com/h-sc/ui?s=UA. “Under Armour, Inc. Class C Common Stock (UA).” NASDAQ.com, www.nasdaq.com/symbol/ua. “V.F. Corporation Common Stock (VFC).” NASDAQ.com, www.nasdaq.com/symbol/vfc/....