washingtonpost.com
Investors Could Find A Chink in Under Armour

By Jerry Knight
Monday, November 28, 2005

Not since Cal Ripken Jr. has Maryland produced as rich a sports hero as Kevin Plank.

Though he never played a professional game, the former University of Maryland football player last week became a $13 million bonus baby when the athletic underwear company he founded sold stock to the public.

Plank sold a million shares, a fraction of his holdings, in the initial public offering of Under Armour Inc., whose high-tech T-shirts and athletic supporters are worn by hundreds of professional athletes and thousands of wannabes.

Under Armour's IPO was Wall Street's most successful offering by an American company in five years, the first to virtually double on its opening day since a now-forgotten, or at least forgettable, California maker of computer chips called TransMeta Corp. back in November 2000.

Stock in Baltimore-based Under Armour was originally intended to be sold for $7.50 a share but was marked up to $13 a share at the last minute because demand was so great. When trading began Nov. 18, the stock jumped to $31, then settled back to close at $25.30, up 95 percent for the day.

What would have been a very good day for Plank turned into an incredible win. He went into the IPO process hoping to take out $7.5 million in cash and retain holdings worth about $112 million. When the dust settled, Plank had $13 million in his pocket and a stake worth $360 million.

Under Armour has a big following among Maryland investors, and those who got in on the IPO also made out like gangbusters -- a $1,300 purchase of 100 shares in the IPO generated a one-day profit of $1,230.

If, that is, investors were smart enough to sell their stock in the first-day frenzy.

And they'll still do well if they are smart enough to sell it soon, before reality catches up with the Under Armour myth.

In the first week of trading, Under Armour shares already have fallen more than 9 percent from their first-day close, ending Friday at $23.68 per share.

That is a hint that Under Armour shares may perform like an over-trained athlete who peaks too soon and then slowly fades into ordinariness. Executives at Under Armour said government regulations, as they interpret them, prevent them from commenting on the offering.

Already a stock picker who recommended buying into Under Armour is urging investors to "protect your profits." In other words, take the money and run.

A few days before the IPO, multimedia investment adviser James Cramer predicted that Under Armour stock would pop on the first day of trading. Cramer is a co-founder of TheStreet.com, a Web site popular with active traders and is the host of the daily "Mad Money" show on CNBC cable. (He's the red-faced guy who yells and gesticulates madly throughout.) And, when he's not making investments, he does a radio show.

Cramer first talked about Under Armour on the radio, suggesting the stock could jump as high as $30. Even then, however, Cramer made clear that he was looking at the stock as a quick trade, not a long-term investment.

The night before the offering, he told investors that if he got in on the IPO and was able to buy Under Armour for $13 a share, he would be "tempted to ring the register" and sell for quick profit.

The next day, Cramer patted himself on the back for telling people how to make $1,000 overnight and repeated his personal view on Under Armour.

"I do believe it can go higher," he said, "But I also believe that if you went out and bought some nice sweaters with the thousand dollars you might have from the trade, you could be happy and warm for years to come."

"Happy and warm for years to come" hardly describes investors who bought into the last couple of IPOs that delivered first-day performances like Under Armour's.

Back in 2000, TransMeta jumped to $45.25 a share from $21 on its first day of trading. On the second day, TransMeta stock inched up to $45.61. On the third day, it started to fall. It's been downhill rather steadily ever since: TransMeta shares closed Friday at $1.22.

This year there was Baidu.com Inc., a Chinese rival to Google in the Internet search business. Baidu gets an asterisk in the record book because it is a Chinese company, though its shares do trade on the Nasdaq Stock Market. Baidu shares rocketed from their $27 offering price to $122.50 when trading began Aug. 4. But the stock quickly started to slide and closed Friday at $83.77.

That pattern underscores that a big opening day in the stock market doesn't forecast success and may well indicate the opposite.

Why? Because hyperbole and wishful thinking can overwhelm rational analysis, especially among investors who are starry-eyed about a glamorous company.

The Under Armour legend is well known: A walk-on football player at College Park, Plank went into the underwear business after some of his Terp teammates went on to the National Football League.

Grossed out by the stinking, sweat-swaddling cotton shirts that football players wear beneath their pads, Plank found fabrics that wick moisture away from the body, allowing it to evaporate. By picking the right fabrics, Plank created athletic undies that are warmer in cold weather, cooler in hot weather and cool enough style-wise to be worn by people who play in the couch potato league.

Using his sports connections to persuade professionals to try his products, Plank quickly proved that he had built a better perspiration trap. He gave away a couple of hundred T-shirts during Under Armour's first year in business, 1995, and sold $205 million worth of Under Armour products last year. Sales came to $194 million in the first nine months of this year, when the company generated a $12.7 million profit.

Today, Under Armour dominates the market for what is known as "compression underwear." Conventional cotton T-shirts are cut big and loose so the sweat they soak up drips away from the body. Most Under Armour is skintight, too tight to be comfortable for a lot of people. The tight fit and the wicking fabric combine to move moisture away from the skin.

Other, bigger names, among them Nike Inc., are moving into compression sportswear. Even though Under Armour has what economists call "first mover advantage" in that field, the company is puny compared with Nike, which spends more each year on advertising than Under Armour generates in revenue.

Not intimidated, Under Armour is launching a line of football shoes and is expanding away from its active sportswear base into more fashion-oriented clothing, a market that is much bigger but also much more competitive.

But it may not be Nike that threatens Under Armour's stock price. It could be Kevin Plank, his family and friends.

Plank owns more than 15 million shares of the stock, and members of his family own several million shares more. In addition to the million shares sold by the founder in the IPO, 825,000 shares were sold by four family members, who split almost $11 million.

Much of that stock owned by Plank and his family can't be sold immediately but will become eligible for sale in coming months. So will about 3.5 million shares owned by venture capital investors who bankrolled the company's early years.

The initial demand for Under Armour shares was strong enough to soak up all the shares sold in the IPO. But with the stock already showing some weakness, the market could be swamped if Plank and friends decide to sell more.

IPO investors who don't want to take Jim Cramer's advice to sell out now need to keep a close watch on what Under Armour insiders do next. If they're selling, you should be, too.

View all comments that have been posted about this article.

© 2005 The Washington Post Company