Nike Inc. (NKE) will sprint onto the earnings stage after the close of trading on Thursday, and the company appears poised to blow past Wall Street’s expectations once again.
The company has a history of besting the consensus estimate, topping analyst projections in every quarter for the past two years. However, NKE stock is trading in overbought territory, creating a bit of a conundrum for traders heading into the company’s fourth-quarter report.
For the record, Nike is expected to post a profit of 83 cents per share, up 6.4% from the 78 cents per share reported in the same quarter last year. Revenue is seen rising 3.5% to $7.7 billion.
Nike quarterly sales growth has dipped below the 10% range for the past couple of quarters, as the popularity of the “athleisure” begins to wane. Still, Nike’s remains a strong growth brand worldwide.
Technically speaking, NKE stock has stair-stepped its way higher in 2015. Year-to-date, NKE has gained nearly 11%, with the shares tagging a fresh all-time high above $106 last week. While the stock looks strong, NKE’s recent burst of strength has left the shares in a short-term overbought position, indicating that a period of consolidation or profit taking may be in order.
On the sentiment front, analysts are quite smitten with NKE stock. Specifically, Thomson/First Call data points to 20 “buy” or better ratings and eight “holds,” with nary a “sell” to be found. The 12-month consensus price target could be a sticking point, however.
With the current target of $110 representing a premium of only 3.2% to Friday’s close, there is room for improvement here, but only if Nike hits the upper end of Wall Street’s earnings expectations. Otherwise, a flat report could result in downgrades to “hold” ratings as analysts adjust to a perceived fair value for NKE.
Click to Enlarge The recent run-up has prompted a preference for calls among short-term options traders, with the weekly Jun 26 series taking the burnt of the call activity. Specifically, the weekly Jun 26 series put/call open interest ratio has fallen to its current perch at 0.57, with calls practically doubling puts among options set to expire at the end of this week. This ratio rises to 0.70 when we pan back to the June/July series of options, with calls still maintaining an edge over puts.
Overall, weekly Jun 26 series implieds are pricing in a potential post-earnings move of about 3.5% for NKE stock. This places the upper bound near $110.27, while the lower bound lies at $102.73. A post-earnings rally would push NKE further into all-time high and overbought territory, while a decline could send the shares down for a test of support near $100.
2 Trades for Nike Stock
Call Spread: For those traders willing to take a chance on NKE stock and side with the bulls, a weekly Jun 26 series $107/$110 bull call spread stands a fair change of turning a profit. At last check, this spread was offered at $1.19, or $119 per pair of contracts. Breakeven lies at $108.19, while a maximum profit of $1.81, or $181 per pair of contracts, is possible if NKE closes at or above $110 when June options expire.
Put Sell: Alternately, if NKE’s oversold position has you worried but you are still leaning bullish, you could look into a put sell position. Along those lines, a weekly Jun 26 series $100 put sell might be a way to capitalize on NKE’s technical support. At last check, the Jun $100 put was bid at 29 cents, or $29 per contract. The upside to this put sell strategy is that you keep the premium as long as NKE stock closes at or above $100 when June options expire at the end of this week. The downside is that should NKE trade below $100 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $100 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
