Nike (NKE) has become the world’s most recognized apparel brand. For investors that just did it and bought NKE stock, they’ve enjoyed a tremendously profitable sprint in the stock during recent years.
However, since October, shares have shown fatigue. NKE stock has suffered its worst selloff since 2012. Shares started to stabilize, but took another turn lower following March’s disappointing earnings report. Is Nike stock just taking a breather, or is there a more serious injury to the company’s outlook?
NKE Stock Pros
Great Growth: Nike continues to exhibit excellent growth. In the most recent quarter, growth was above 10% in every single region of the world. Central/Eastern Europe and China led the way up by breathtaking 29% and 27% rates respectively. The slowest growing region, Western Europe, was still up 12% in a very weak economic climate there.
Despite some significant currency headwinds, Nike continues to grow sales at a robust clip. While NKE stock may take a pause due to its high underlying valuation, make no mistake, the core business continues to soar. The revenue target of $50 billion by 2020 remains clearly in sight.
Fantastic International Presence: While Nike is clearly strong in its domestic market, don’t sell overseas markets short. Nike already generates more than 10% of its total sales from China. And this segment is growing at almost 30% a year. Compounded at that rate, the Chinese segment would double in size every three years. That’s pretty amazing.
North America accounts for less than half of Nike’s overall sales. Western Europe is the company’s next biggest market, and together these two regions account for two thirds of sales. That leaves a third of the company exposed to the rest of the world. Almost all of that exposure comes in rapidly growing markets, namely, China and Latin America. Given the favorable demographic and economic trends for those regions, NKE stock is well positioned to take advantage of population growth and rising consumer incomes in emerging markets.
Powerful Brand: Nike has, by far, the world’s most powerful brand. According to Fortune‘s list of the world’s 100 most valuable brands, Nike scores a big win, ranking at #18. For comparison’s sake, only two other apparel brands make the list, and they’re near the bottom. Adidas weighs in at #83, and Polo Ralph Lauren (RL) at #89.
According to Forbes, Nike’s brand is worth more than $26 billion. If that estimate is accurate, that means that a quarter of the Nike stock price is supported simply by the value of its brand. It’s a huge intangible asset. Nike isn’t just strong with consumers. It is deeply embedded into the athletic world through endorsements and team choices. In collegiate athletics in particular, Nike has a lock on the market, ensuring long streams of recurring revenues.
Nike Stock: Cons
Low Yield: For a blue-chip company, NKE stock pays a rather pedestrian yield. At today’s price, the stock yields barely more than 1%.
In credit to the company, it has grown the dividend at a very respectable 15% annualized clip over the past five years. Even with that noted, a buyer in 2011 is still only receiving a 2% yield on cost for their NKE stock today. If you are looking for a blue chip stock that can immediately help out with your bills, NKE stock probably isn’t your best choice.
Stephen Curry: The rise of Stephen Curry has taken the basketball world by storm. Normally basketball superstars are larger than life figures. So Curry, at an unassuming 6’3 and 190 lbs, has been a bit of a surprise. He makes his mark with long 3-pointers instead of breathtaking dunks. Regardless, he’s basketball’s current superstar, and in a break from tradition, he’s signed with Under Armour (UA).
Curry is the fastest-growing footwear phenom since Michael Jordan himself. With Jordan line products still accounting for more than half the basketball shoe market, NKE has dominated this space for ages. More than half of Nike’s total sales come from footwear, while Under Armour currently gets a trivial $700 million annually from the space.
According to a detailed report by ESPN, Nike lost Curry by treating him poorly. They refused to give him certain perks common for other up and coming young prospects, and they mispronounced his name when meeting with him. This opened the door to Under Armour, and they’ve seized the opportunity.
Analysts forecast that Curry’s shoe sales will be $160 million in 2016, edging out LeBron for the top spot among active basketball players. With a career trajectory similar to Jordan, sales could top $1 billion annually by the time Curry’s career peaks. For Under Armour, that would be 150% greater than their entire footwear sales prior to Curry getting popular. Losing Curry was a big blow to Nike, both financially and in terms of prestige.
Valuation: NKE stock is expensive. Nike stock is, in fact, extremely expensive. Between 2004 and 2011, Nike traded with a P/E below 20. Since then, the P/E ratio has exploded higher, and now sits at a lofty 28. Normally, companies’ P/E ratios start to compress as they grow; Nike is going in the other direction.
Adding insult to injury, Nike benefited from a change in its tax rate. Historically, its tax rate has run around 24% or 25%. This sharply dropped to 18% over the most recent 12 months. That’s great, it adds a huge boost to earnings. But if the tax rate returns to historic norms, earnings will drop.
EBITDA grew far less than earnings over the past year, suggesting that recent results seem overly optimistic. On a pure EV/EBITDA basis, the company has moved from its traditional 10-12 ratio up to a stunning 20. Over the past 15 years, this is uncharted high territory. On a purely valuation-centric basis, NKE stock would have to drop by a third to get in back toward more normal valuation levels.
Verdict
Nike is a great company. Their brand is huge and will only grow with time. But at today’s prices, you’re betting on everything going right. And with the company’s pivotal basketball franchise under fire from Stephen Curry-led Under Armour, there’s a good chance that NKE stock will struggle in the near term.
At the time of this writing, Ian Bezek had no position in any stocks mentioned. You can reach him on Twitter at @irbezek.
