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) --

Under Armour


was a standout performer on Monday after Canaccord Genuity initiated coverage of the Baltimore-based sports apparel company with a buy rating and a 12-month price target of $75, implying potential upside of nearly 30% from last week's close.

"In our opinion, the brand acceptance UA has earned is only strengthening," the firm said in a note to clients. "As such, we see a clear path for UA to maintain a high level of revenue growth while also generating operating margin expansion over the next 18-24 months."

The stock jumped 6.3% to $56.10 in recent trades. Volume of 1.3 million was roughly in line with the issue's three-month daily average of 1.4 million with less than 30 minutes left in Monday's session. Earlier in the day, the shares ran as high as $57.25. Even at that level though, they are down 31% since hitting an intraday 52-week high of $82.95 just over a month ago on July 21.

Canaccord Genuity sees three drivers for topline growth at Under Armour, which has beaten Wall Street's earnings expectations in nine straight quarters; most recently delivering a 40%-plus upside surprise for its fiscal second quarter on July 26.

The firm lists the company's "aggressive" factory outlet growth strategy, its decision to enter the cotton-based active use apparel market, and its "continued innovation and new product introductions/extensions in its core apparel category" as the drivers for continued sales increases. It sees the factory outlet push as most significant over the next two years.

"We believe Direct-to-Consumer (DTC) growth will be the most relevant growth driver for UA through 2013, adding an incremental $349M to sales from 2011-2013 or approximately 46% of the total projected dollar growth in sales," the firm wrote. "At a conservative 11% EBIT

earnings before interest and taxes margin, this equates to ~$0.44/share in earnings power over the next two years."

Even with the pullback of late, Under Armour shares were up more than 40% in the past year prior to Monday's surge, putting the stock's forward price-to-earnings multiple at 24.9X, more than double that of the beaten-down

S&P 500

, which closed last week at 10.7X.

Canaccord Genuity acknowledged the valuation is high relative to peers but says the stock has enjoyed a premium in the past, typically trading at 35X forward earnings, and argued the shares still merit that status.

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"UA has consistently traded at a premium valuation relative to its peer group, and we believe the visible growth drivers available to the company warrant such a premium," the firm said.

The company's push into the cotton-based active use apparel under its

Charged Cotton

brand greatly expands its estimated addressable market, Canaccord Genuity said. By Under Armour's own math, its current synthetic-based active use market opportunity is about $3 billion, and the total active use market is $11.3 billion. The firm got fairly granular in an attempt to illustrate the potential.

"Speaking to the "share of closet" opportunity, an average consumer's closet has 30 Tshirts, of which five are synthetic performance T's and 25 are cotton T's," Canaccord Genuity said. "While UA commands four of the five performance shirts in the closet, the remaining 25 are represented by other brands. It is that segment that UA is now pursuing."

A decline in gross margins has been a recent bugaboo for the company but Canaccord Genuity believes the factors driving the trend - a supply chain bottleneck, an unfavorable product mix at outlets and industry-wide rising input costs -- are transitory and should begin to abate in the third quarter. It also thinks the company will be able to get consumers to pony up a bit more.

"UA is expected to begin raising price selectively this fall season and more broadly in spring 2012 to mitigate the margin pressure," the firm said. "This is the environment in which brand loyalty will matter most, we believe."

Wall Street has been lukewarm on Under Armour for a few months now. Of the 23 analysts covering the stock, 14 are at either hold (12), underperform (1) or sell (1). That's actually more optimistic than three months ago when 20 of the 23 analysts were at either hold (17) or underperform (3). The median 12-month price target still sits at $80 however.


Written by Michael Baron in New York.

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Michael Baron


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