Sunday, March 13, 2016

Under Armour Spin Leads League Schooling Wall Street's Finest

When: Monday to Friday
Time: 9:30 to 4pm
Its A Technology Company
3-D Printing
 CHINA Hyper Growth Story
Exaggerated Earnings Beat
*Note classes on each day may vary depending on the Wall Street flavor of the day.
** filings on Friday Night after the close are intentional and are not recommended reading. 
***ALL Morgan Stanley Research regarding A Downside Risk of $42 (-50%) should be ignored.

Equities Research Warning: SELL Under Armour
Equities Research is speculating that Under Armour (NYSE: UA) will announce in the next 4 weeks an equity or debt underwriting before the company announces results for the first quarter in late April 2016. Under Armour 1st quarter ends March 31,2016.
Equities Research believes Under Armour will raise capital before the Q1 report because of expections the company will miss Wall Street analyst Q1 EPS estimates of $0.05 per share. Equities Research believes Under Armour Will Report a LOSS for FY2016 Q1.  

Under Armour Needs cash and can not afford to take a risk of a poor Q1 earnings report's effect on its stock, a significantly weaker market capitalization would make any underwriting done after a poor report to adversely effect pricing.  Under Armour disclosed on their FY2015 Conference call that they would "look for Opportunities to refinance their debt".  The company's total debt increased to $669 million for the period ending December 31,2015 up from $284 million for the period ending December 31,2014.  The company also noted that FY 2016 interest on debt would increase to $35 million (approximately $0.16 per share). 

To keep the stock higher, Under Armour has put on a "FULL COURT PRESS" , literally. A day doesn't go by without a major news wire reporting Spin after Spin, from Barron's to TheStreet to every message board on the planet, the company has touted their scouting expertise at finding high school athletes in AAU  to Silicon Valley technology ventures with IBM's Watson.

The only Scoreboard that matters to Equities Research is not in the headlines, but in the BOX SCORE, also known as audited financial statements filed with the Securities & Exchange Commission.
  • December 31,2015 Cash & Cash equivalents were $129 Million down from $593 Million from December 31,2014.   (78% Decline)
  • FY2015 Cash Flow from Operations was Negative $44 Million down vs Positive $219 Million in FY2014. A Decline of $263 Million year over year. 
  • $48 million of the $129 total cash is held in foreign subsidiaries, while only $81million is available in the US. Foreign Subsidiary held cash is not expected to be used in US due to tax consequences.

Friday Night Dump
Under Armour (NYSE: 82.45) filed a DEF 14 filing with the Securities & Exchange Commission late Friday after the close, also known as a #FridayNightDump.

  • (SPIN) Kevin Plank CEO Compensation Drops 31.5% 
At first glance it looks like CEO "took less" compensation in the best interest of the Shareholders, but  after digging into the DEF14A we learn otherwise.  It turns out that in addition to the CEO, Maurath the Chief Revenue Officer also earned less compensation  This was not a shareholder friendly decision, but instead as disclosed in the filing, these two officers compensations declined by an aggregate of $1.8 million as a direct result of financial performance (or lack their of).
A small $1.8 million compensation number may sound insignificant, but as I will get to later I will show how this "little" number made a $4 Billion Increase to the Company's market capitalization within a 48 hour period. What really is even more alarming is that this disclosure is only being surfaced 6 weeks after an opaque FY2015 earnings report was hyped.

Down 17% in 3 Weeks
On Wednesday January 27th Under Armour traded at a low of $66.93 and was down $14 Year to date from its $80.61 December 31,2015 close. (-17% in 4 weeks).
Under Armour traded on October 12,2015 at an all time high above $104.74 and the following day the CFO resigned and the shares would eventual fall to a 52 week low of $66.93. (Down $38 in 3 months, a  -37% drop in 90 days)

Up 28% in 2 Days
On Thursday January 28th pre market, Under Armour announced FY2015 earnings and by the close on Friday the shares had Sky rocketed to close the week @ $85.43, UP $19 in two days or 28%.

Friday night March 11th we learned a "little more" about how Under Armour "BLEW AWAY THE WALL STREET ANALYST ESTIMATES" back January 28th.  A $0.02 Beat for a company with 220 million shares outstanding would be a beat of $4.4million. But the company beat the net income estimate by only $3.2 million based on the release. Now after finding out Friday night , 6 weeks later, that the CEO and CRO earned less than an aggregate of $1.8 million vs. FY2014 due to not meeting financial performance targets. We now need to subtract the $1.8 million from the $3.2 million beat and we end up with a beat of only $1.4 million, which is an ACTUAL BEAT of $0.006 (less than a penny and NOT $0.02 that WALL STREET FINEST USED TO PUMP MARKET CAP UP BY $4 BILLION within 2 days!

Using the Actual Math, and not the Spin Number, Under Armour DID NOT Grow Earnings by 20% in FY2015 Q4 vs. FY2014 Q4. Earnings only grew by 18%.

Stephen Curry was mentioned 27 times on the morning Conference Call and the word "CASH" was mentioned once.  

Positive EFFECT OF TAX LOSS Carry Forwards on NET INCOME (NOL)

February 22,2016 the company discloses in SEC 10K filing that Accounting Errors have been discovered in the cash flow statements for FY2015 Q1 and Q2.

Down 18% in 6 Days
Sunday, January 31st Equities Research downgrades Under Armour to a Sell, shares fell $15 over next 6 trading sessions from $85.43 to a low of $70.33, down 18%. (humble note: BOJ announcing NIRP on the 29th brought the entire Global Market to its knees, until (SPIN) Jamie Dimon and Warren Buffet   touted how the USA  market was a great buying opportunity and all is well).

Up 17% in 4 Weeks

Friday, March 11th Under Armour closed @ $82.45 up $1.45 on the day.

  • (SPIN) Under Armour, (the Technology) Company Makes Huge Splash at Consumer Electronics Show.
  • (SPIN) CEO Kevin Plank "spoke with" CEO of IBM about IBM's "HEALTH HUB"
  • (SPIN) IBM WATSON can let you know how you're feeling today on Scale of 1-10).
 •(SPIN) "Lewis: Yeah, I think when you hear IBM Watson you have that, whoa, this is some serious data analytics and serious AI-type work that they're going to be doing."
 •(SPIN) Under Armour deems it necessary to file 8K on March 4th to inform the public that The Sports Authority bankruptcy will not effect Under Armour.
On Wednesday March 2nd, a week after Under Armour filed their 10K , The Sports Authority filed bankruptcy and announced the closing of 140 of its 463 stores. Analysts estimate that The Sports Authority generated revenue of $3 billion in 2015. The bankruptcy filing lists Under Armour as one the largest creditors with $23 million in receivables. 
Under Armour immediately came out with an (8K) announcement DEFENDING its FY2016 guidance and stated The Sports Authority will not have an effect on FY2016 projections. 

Although Under Armour filed an 8K saying otherwise, Dick's CEO says company will see increase selling pressure in months to come due to liquidations at The Sorts Authority.

Thanks to the genuis of Ophir Gottlieb the founder of Capital Market Laboratories, I am able to share his TRADECARD graphs from his CMLVIZ website.

NEGATIVE $44 MILLION Cash Flow from Operations ttm
NET INCOME $232 Million ttm



OLSTEIN: Earnings vs. Cash Flow

New York Times  7/18/1999 

"EARNINGS VS. CASH FLOW -- Mr. Olstein first examines what a company generates in cash flow from its operations. A company with excess cash flow can raise dividends and survive tough times without being forced to borrow or sell assets.
To calculate a company's cash flow, start with net income. Add back what it has taken in depreciation expenses and accounts payable. Then subtract capital expenditures, inventories and accounts receivable.
Watch out, Mr. Olstein said, if net income is much higher than cash flow. The company may be speeding or slowing its booking of income or costs, perhaps to meet analysts' earnings forecasts."

 Fortune Magazine  6/26/2000

  Eight Warnings You Want to See by Herb Greenberg

"Positive free cash flow. Olstein looks at a company's financials, specifically the 10-Qs and 10-K, and makes a beeline for the statement of cash flows. We're not talking about the stated cash flow from operations, investing activities or financings. We're talking about cash flow from operations minus capital expenditures--the amount of usable cash the company actually generates, which can be used to buy back stock, pay dividends, make acquisitions, and grow the business." 6/25/01

Fund Junkie by Ian MacDonald
" Our main defense against risk is only buying companies that either are currently generating excess cash flow, or will in the next three years."

Financial Advisor Magazine August 2001
Staying Alert Pays Off by Maria Brill
"To Olstein, being right means finding companies with excess cash flow that are selling at inexpensive levels because investors are tuning them out. "Cash flow is the oil that lubricates the corporate engine," he observes."

 The Washington Post 2/17/2002
"By concentrating on cash, investors can learn enough about a company to eliminate it as a possible investment. FOr example, if you want to get a quick-and-dirty reading, look not at a firm's "income statement" but at a more obscure tables of numbers called its "statement of cash flows".

New York Times 11/14/2004 
Sometimes It Takes a Sherlock by Gretchen Morgenson
""Everyone looks at conventional price-earnings ratios but that doesn't tell you anything about the deviation between cash flow and reported earnings," Mr. Olstein said."

 Financial Advisor Magazine June 2006
Forensic Accounting by Jeff Schlegel
"Olstein believes that cash--particularly free cash flow--is king because he thinks it's a truer measure of a company's underlying performance. He and his staff analysts look for companies trading at a discount to free cash flow. Lack of free cash flow is one reason why he doesn't like (a sector) ..."

 CFA Institute 12/4/2007
Free Cash Flow & Quality of Earnings by Fred H. Speece, Jr. CFA

BloombergBusinessweek 8/17/2009 
Behind Bob Olstein's Comeback by Karyn McCormack
" quality companies that have "wide moats" (in other words, "hard to compete with out of the box"), have been generating free cash flow throughout the financial crisis, and have a great balance sheet to withstand any issues."

 New York Times 1/9/2010
Fair Game:Why All Earnings Are Not Equal by  Gretchen Morgenson
As the market goes higher, it becomes more important to measure the quality of corporate earnings, he said. You have to look behind the numbers.
Adjustments that investors need to make now, in Mr. Olstein's view, are a result of disparities between a company's reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.

SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures."

 New York Times 9/11/2010
Cash is king, he says. He spends a lot of time crunching numbers in a search for strong cash flow, and his winnowing process goes something like this:
First, he scrutinizes a company's financial reports in an effort to determine whether they paint an accurate picture. In this work, he has considerable expertise: he was an auditor with the old Arthur Andersen & Company, and then, in the 1970s, was co-author of The Quality of Earnings, a financial newsletter that, in its day, was perhaps the foremost authority on spotting the gray areas of corporate accounting.
If you're analyzing a company, he says, you first have to understand what they're really earning, as opposed to what they say they're earning.  

 American Association of Individual Investors  October 2010
"the forensic analysis we undertake
to analyze a company's results and the quality of its
earnings for valuation purposes.
1. Using the company's cash fl ow statements, we begin by
reconciling the difference between free cash fl ow and
reported earnings under accrual accounting. (Accrual
accounting records revenues, expenses and income
when the transaction occurs, as opposed to when
the cash is actually received or spent.) The smaller
the difference between free cash fl ow and reported
earnings, the higher the quality of earnings."

 Barron's 4/30/2011
Depreciation, An Appreciation by Lawrence C. Strauss
"He grows more concerned when a company's reported earnings significantly exceed its cash flow,..."

 Value Investor  4/30/2012
"Describe where you look first in researching
a company's financials.
RO: We begin by reconciling the difference
between free cash flow and reported
earnings under accrual accounting. The
smaller the difference, the higher the
quality of earnings. The bigger the difference,
the more work we have to do to
understand the makeup and sustainability
of free cash flow."

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