On Thursday, after the market closes, Nike Inc. (NKE) will report its fiscal Q2 results. If the pros are collectively on target, the earnings report should indicate the company earned 70 cents per share of Nike stock last quarter, on $7.15 billion in revenue.
Both would be significantly better than the year-ago comparisons, and just for the record, the company almost always tops its estimates.
That likely earnings beat for its second fiscal quarter, however, doesn’t inherently mean Nike stock is a buy at this point in time.
While the earnings announcement is apt to show tremendous progress, the stock’s gained 23% since the middle of the year, pushing an already-frothy valuation to uncomfortable levels by most standards.
The question NKE shareholders (would be or current) may want to ask themselves now is, is there any upside left based on the company’s plausible future?
NKE Earnings: What to Expect
For perspective, analysts expect results to consist of a profit of the aforementioned 70 cents per share of NKE stock, up 18% from the 59 cents per share the company earned in the second quarter of the previous year. The projected sales figure of $7.15 billion is 11% stronger than the year-ago figure of $6.43 billion.
And betting against an earnings beat hasn’t been a good idea of late either. Nike Inc. has managed to top earnings estimates in each of its past nine quarters, and posted earnings growth in each of the past eight quarters. The typical annual earnings-growth pace has been roughly 10% since 2011, and that pace is still in place.
In fact, it’s picking up speed.
Analysts currently believe the company will earn $3.51 per share of Nike stock in fiscal 2015, up 21% from 2014’s bottom line. Full-year sales are projected to roll in at $30.7 billion, up 10% from 2014’s tally of $27.8 billion.
Following the Nike earnings report for Q1, posted in September, the company upped its full-year earnings guidance. Another strong quarter, though, could prompt another improved outlook.
Although NKE clearly has a great deal going for it at this time, investors may want to pay special attention to these key aspects of the company’s business on Thursday:
- Overseas markets: Nike’s sales in China grew 20% in the first quarter, partially driven by expansion efforts there, and partially driven by the fact that its competitors have retreated a bit there. Sales in Western Europe were also surprisingly strong in Q1, up 25%. The big growth clearly isn’t a domestic opportunity.
- Margins: While sales and profits are both growing, some are concerned that the pace of growth is going to be a little lackluster compared to Q1’s outstanding growth pace. Canaccord Genuity analyst Camilo Lyon recently pointed out that second quarter expenses are expected to be noticeably higher than they were in the first quarter.
- Women: It’s unlikely the company will be able to quantify much about its recently-strengthened effort to cater to women, but it’s undoubtedly one of the most important pieces of its growth puzzle. For example, NKE has already opened a handful of stores that only sell women’s athletic clothing. Last year, sales of Nike women’s wear reached a 12% clip, versus only 9% growth for the company as a whole. This is going to be a very important segment of consumers going forward. How will Nike Inc. capitalize on them?
Bottom Line
While the company has earned all of its growth and is apt to reach 2015’s lofty targets, much of that growth — perhaps all of it, and then some — is already priced into Nike stock.
As of Monday’s close, NKE is valued at 29.9 times its trailing earnings and 23 times its projected fiscal 2016 income (ending in May of 2016). Some stocks have survived worse, and some of those have even thrived with such a frothy valuation. By and large, however, its price/earnings ratio is apt to keep any additional upside to a minimum in the near-term.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
