Under Armour Cash Flow Should Have Investors Running Away

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Stockdiagnostics.com in Barron's

about Equities Research @stockpicker908 tweeter handle

(my former twitter handle was @GFNNStock)

"From time to time I'm asked about analysts, diggers whose work I really respect, who do things well. Tom Renna, @GFNNstock, is a must follow— Roddy Boyd (@BoydRoddy) September 7, 2013

Feb. 5,2015 -- Under Armour CEO Kevin Plank talks about why he's buying the MyFitnessPal and Endomondo apps for a total of about $560 million.
         Equities Research Looks at Under Armour

*Negative Cash Flow (~goodwill $472 million)

*Class Action Lawsuit Settlement

*CEO New Stock Trading Plan

*Series Class C Shares
CFO/COO Departure
*Morgan Stanley Downgrade $62 (1/30/16) 

On Thursday morning Under Armour (NYSE: UA) reported FY2015 earnings sending the stock $20 higher from $65.58 to close the week @ $85.43. Up 30% in two days.

Record Sales and earnings were super impressive, but a close look at the cash flow statement raises a RED FLAG.

note: As of Sunday (1/31/16) Under Armour has not yet filed their 10K annual report with the Securities and Exchange Commission as of this morning so we are not able to dig deep into footnotes and other exhibits at this time.

A look at the 8K filed on Thursday can be found here. 

Before I jump to the FY2015 Negative $44 Million Operational Cash Flow, lets look at 2 recent SEC filings that should make investors wonder how many total shares are really outstanding when including Class A, Class  B and Class C shares.

Shares Fall 8.5% in 1 day
On November 12,2015 Under Armour traded at $94.16 with volume of 3 million shares.
On November 13,2015 Under Armour traded at $86.08 with volume of 7 million shares.
What happened?
At 10am November 12th CEO Kevin Plank filed this SC 13D/A with the Securities and Exchange Commission.

"(Kevin Plank) entered into a pre-arranged stock trading plan to sell shares of the Issuer’s Class B Common Stock and, if and when issued, the Issuer’s Class C Common Stock."

"If the Reporting Person completes all the planned sales under this trading plan, he would beneficially own 35,700,000 shares of Class B Common Stock and Class A Common Stock, representing approximately 16.6% of the total shares of Class A and Class B Common Stock outstanding as of September 30, 2015 and representing approximately 66.5% of the combined voting power of the Issuer outstanding as of September 30, 2015". 

• CEO Kevin Plank sold 450,000 shares November 23rd. Sold at an ave price of $91.99,( $41,395,500.00) 

Consolidated Class Action Lawsuit
August 14,2015 this DEFA 14A filing with the Securities and Exchange Commission was filed.

"Under Armour ..is currently involved in a consolidated class action lawsuit brought against the Company and the members of the Company’s Board of Directors on behalf of purported stockholders of the Company in connection with the creation by the Company of a new class of common stock, referred to as the Class C common stock, par value $0.0003 1/3 per share"

LAWSUIT SETTLEMENT OCTOBER 2015 
Shares declined from an all time high above $100 in October to a 52 week low in January 2016 

October 7,2015 8K Settlement

October 13,2015 8K COO/CFO Departure



Are You Still Long?
Operational Cash Flow for FY2015 was NEGATIVE $44 Million!
vs
Operational Cash Flow FY2014 of Positive $219 Million.

Year over Year Operational Cash Flow declined by $263 Million

Operational Cash Flow
FY2010: $50 million
FY2011: $15 million
Fy2012: $200million
FY2013: $120 million
FY2014: $219 million
FY2015: NEGATIVE ($44 Million)

Cash Flow used in 2 Acquisitions during 2015.
$475 million for MyPalFitness.com
$85 million for Endomondo
$560 Million total cost, 
$472 million GOODWILL 

Under Armour 
Stock Price has had a History of Following Cash Flow.
November 18,2005 IPO
 Under Writer: Goldman Sachs. 9.5 million shares @ $13 (adj for 2 (2 for 1)splits $3.25).

Shares went from $13 to $68 on August 21,2007.

Enter Equities Research

Equities Research went bearish (A-E) on UA at $68 to $15 before going Bullish.(F)

A Short $68  (70% profit in 15 months)
Hottest Stock with Weakest Cash FLow August 21,2007 $68
 

B.Short $48  (58% profit in 1 year)
Large Caps May Not Always Be Less Speculative

C. Short $ 45 (55% profit in 9 months)

Love Your Valentine, Not Your Stocks

D. Short $38   (47% profit in 3 months)

Beware:  Standard & Poors Adds A Poor Quality Stock to Index

E. Short $33   (40% profit in 3 months)

Easy Money : SHORT UNDER ARMOUR

F. long $15 GFNN news story upgrade

Tuesday, July 24, 2012

Renna Warning on Under Armour Mentioned on CNBC-TV (Herb Greenberg)

Monday, July 30, 2012

Under Armour's Special Effects

by Michael Markowski, Director of Research @ Stockdiagnostics
July 30,2012

December 2012: Stockdiagnostics the Utility
Finding Stocks that Fall 30% to 99%

29 GFNN STOCKDIAGNOSTICS Portfolios created by Equities Research founder , Tom Renna

GLOBAL CROWDFUNDING MARKET TO REACH $34.4B IN 2015, PREDICTS MASSOLUTION’S 2015CF INDUSTRY REPORT

http://www.crowdsourcing.org/editorial/global-crowdfunding-market-to-reach-344b-in-2015-predicts-massolutions-2015cf-industry-report/45376

from CROWDSOURCING.ORG

"Global crowdfunding experienced accelerated growth in 2014, expanding by 167 percent to reach $16.2 billion raised, up from $6.1 billion in 2013. In 2015, the industry is set to more than double once again, on its way to raising $34.4 billion."

How TheStreet (NASDAQ: TST $1.35 dividend yield 7.2%)  properties will grow exponentially during the Crowdfunding Boom.

CROWDFUNDING: PREDICTED TO BECOME THE LARGEST DIGITAL INDUSTRY IN THE WORLD

CROWDFUNDING: PREDICTED TO BECOME THE LARGEST DIGITAL INDUSTRY IN THE WORLD

Opportunist Magazine : Michael Markowski 

"Predicted to Become the Largest Digital Industry in the World"

• Michael Markowski: The decade ending 2020 will be recorded by historians as the best ever for investors to have created immense and dynasty wealth. I am projecting that there will be more than 1,000 companies that multiply by at least 100 times in price over the next five years. The Dynasty Wealth website is loaded with short educational videos. I would highly recommend to all of your readers that they take the time to watch them. The next five years will be the most exciting and lucrative for investing. Prior to this period the only way that individuals had a chance to create dynasty wealth was to have been lucky enough to have lived next door to Bill Gates or Steve Jobs and to have invested into their companies in the early days.

Markowski August Call Simply Amazing!

Thursday, January 26, 2012

Private Shares on Secondary Market: FACEBOOK

Titan Machinery's Inventory Reduction Guidance will Lower Future Sales Significantly

Creditors Forcing Titan To Switch Gears

report by Michael Markowski, www.OnlinefinancialSector.com

When Titan Machinery released its fiscal 2014 year end results on April 10, 2014, it forecasted or provided guidance for its operating cash flow.  Titan stated that it was going to generate $60 million to $80 million in positive non GAAP operating cash flow for its current fiscal year ending January 31, 2015.  It further stated that the method that it would utilize for the Company to generate positive operating cash flow in a fiscal year for the first time in at least six years was its liquidation or its reduction of its equipment inventories by $250 million.  Under Titan’s inventories reduction guidance total inventories would decline from $1.08 billion as of January 31, 2014 to $758 million by January 31, 2015. 

We are highly confident that the decision by Titan’s management to reduce its inventories to $758 million will result in a decline in the Company’s revenue and profits for fiscal 2016 as compared to fiscal 2015.  Fiscal 2016, would be the second consecutive year that Titan’s revenues decline.  Titan, based on its own guidance that it has already given, will depart fiscal 2015 by reporting its first annual revenue decline since it’s been a public company. 

Those who are invested in Titan’s shares are having a great time at the grand party that started as soon as its management concluded their conference call.  During the call, which included a 23 page presentation, Titan’s management provided details and highlights for its fiscal 2014 earnings report.  It also provided guidance for fiscal 2015. 

Every great party always ends with a hangover.  As Titan moves through fiscal 2015, the analysts making of and publishing their projections for its next fiscal year (2016) beginning on February 1, 2015, will become increasingly paramount.   As the analysts and Titan’s institutional investors begin to do their homework we have no doubt that they will come to the same conclusion that we have come to.  Doubts as to whether or not Titan can continue to be a growth company or even meet its EPS projections for 2015 will begin to surface.  During 2013, Titan’s management lowered it EPS guidance for its 2014 fiscal year three consecutive times.  . 

Titan Machinery’s EPS Guidance for Fiscal Year (FY) January 31, 2014

Date of Guidance EPS Estimate FY 2014 Final EPS  FY 2014 04/10/13 $2.00-$2.30 $0.78 05/23/13 $1.70-$2.00 $0.78 09/05/13 $1.20-$1.50 $0.78 12/05/13 $0.55-$0.75 $0.78

There was one highlight at the bottom of page 19 of the presentation which Titan’s management provided to analysts and investors on April 10, 2014 that raised our eyebrows.  It was that the company had “$410.7 Million Available on $1.2 Billion Floorplan lines of Credit”.  On November 14, 2013, Titan’s Credit Agreement with Wells Fargo had been amended.  Under the amended terms and conditions Titan’s Net Leverage Ratio (Total Liabilities/Tangible Equity) was permitted to be a maximum of 3.5 for any fiscal period on or after January 31, 2014.  

According to the Balance Sheet data which Titan published in its April 10^th press release its Total Liabilities were $1.15 billion on January 31, 2014.  Titan’s permitted Total Liabilities under the Credit Agreement that was amended on November 14, 2013 was $1.31 billion.  The maximum net amount that Titan could have increased its Total Liabilities by as of January 31^st was $160 million and not the $410.7 million that the company claimed was available via its unused portion of its Floorplan lines of Credit.  The difference between the two amounts is $250.7 million.  

On April 3, 2014, which was one week before Titan announced its earnings, the company’s Credit Agreement with Wells Fargo was again amended.  Under the new terms the Company’s Consolidated Net Leverage Ratio was decreased from 3.5 to 3.25 by October 31, 2014 and to 3.0 by January 31, 2015.  The Total Liabilities permitted under the amended terms was $1.22 billion for fiscal quarters ending July and October 31^st and $1.12 billion on January 31^st.  This assumes no change in Titan’s tangible book value.  In its guidance Titan indicated that the company would take a $4.2 million pre-tax charge associated with the company’s realignment that it expects to be realized in the first quarter of fiscal 2015.  This charge could lower Titan’s tangible book value and reduce it permitted Total Liabilities. 

Based on the recently amended Wells Fargo Credit Agreement, Titan’s Total Liabilities for its fiscal quarters ending on July 31, 2014 and October 31, 2014, can only increase by $70 million as compared to what its Total Liabilities were on January 31, 2014.  By January 31, 2015, Titan’s Total Liabilities will have to decline by $30 million as compared to January 31, 2014 for the company to remain under its ratio of 3.0.  The unused portion ($410.7 million) of its Floorplan line of credit will be un-utilizable.

Obviously, the decision that management made to reduce its inventories for the purpose of Titan to begin to generate positive operating cash flow was based on necessity.   However, Titan’s management overreacted in their including a $250 million reduction of inventories by January 31, 2015, in their guidance for Fiscal 2015.  Titan’s management did not do their homework.  They have not seriously considered the ramifications or repercussions from their reducing inventories by 25%. 

There are two issues that Titan’s management should have considered before they calculated the amount of that they were reducing their inventories by for their fiscal 2015 guidance.  If these issues had been considered we believe that they would have made the decision to reduce Titan Machinery’s Inventories by an amount that was much less than $250 million.   

The first issue that they did not address is that there is a strong historical correlation between Titan’s revenue and its Inventories growth rates.  The table below illustrates and compares the growth rates of Titan’s inventories and revenue for its fiscal years 2010 through 2014.  The decline in the growth rate of its inventories for 2014 to 8.5% from 24.2% resulted in a sharp decline in its revenue growth rate to 1.3% from 32.5%.  

Growth Rates for Titan Machinery’s Inventory and Revenue for Fiscal Years 2010 through 2014

Fiscal Year Inventories Growth Rate Revenue Growth Rate 2014 08.5% 01.3% 2013 24.2% 32.5% 2012 74.0% 52.3% 2011 23.5% 20.4% 2010 44.4% 21.4%

The second issue that Titan’s management failed to consider is the company’s historical Revenue/Inventories ratio.  The table below further illustrates the relationship or ratio between Titan’s revenue and its inventories.  The ratio or multiple of Revenue that Titan has generated has ranged between 2.06 and 2.53 times its inventories since 2010. 

Titan Machinery’s Revenue/Inventories Ratios, Fiscal Years 2010 through 2014

Fiscal Year Revenue Inventories Rev/Inv Ratio 2014 2.23B 1.08B 2.06 2013 2.20B 929M 2.37 2012 1.66B 748M 2.22 2011 1.09B 430M 2.53 2010 838M 348M 2.41

Titan has forecasted that it will reduce its inventories from $1.08 billion to $758 million by January 31, 2015.  It’s the one and only forecast in Titan’s guidance that will be easy for them to achieve.

Since Titan’s $250 million reduction in its Inventories is all but guaranteed it’s much easier for even a novice to project future revenue for the company.  Projecting the minimum and maximum ranges of future annual revenue for Titan is as simple as multiplying the projected amount of inventories by the company’s lowest and highest revenue/inventories ratios over its prior five years.  With the reduction in Titan’s inventories we are projecting its revenue range for fiscal 2016 to be $1.56 billion at the low end and $1.91 billion at the high end.  Our top end number for 2016 is below Titan’s low end revenue number of $1.95 billion for fiscal 2015. 

Titan’s management in providing guidance on its operating cash flows and reduction in inventories has painted itself into a corner.  Its due to them not considering the downside regarding the reduction of inventories by 25% in fiscal 2015 as compared to fiscal 2014.  Its extremely difficult for any company to make the argument that they can continue to increase revenue while significantly decreasing inventories.  We have no doubt that savvy investors and analysts will confront Titan’s management with the same mathematical argument that we are making.  Titan’s severe inventory reductions will result in its generating significantly lower revenue and EPS for both its 2015 and 2016 fiscal years.       

As soon as the stock market starts to price in or discount the increasing probability that Titan Machinery will have lower revenue in fiscal 2016 as compared to fiscal 2015, its share price will begin to head lower and go to a single digit price to earnings (PE) multiple or ratio.  Either actual or projected consecutive annual revenue declines will relegate Titan Machinery to being a cyclical tractor dealership play.  Based on Titan’s minimum non GAAP earning per share projection of $.70 and maximum of $1.00, and its history of guiding forecasts down during prior fiscal years we are projecting that its share price will be trading below $10 by the end of 2014.