Nike Inc (NKE) Stock Looks Ready to Bottom Out

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Shares in Nike Inc (NYSE:NKE) fell in sympathy with Under Armour Inc (NYSE:UA) Tuesday to hit a new 52-week low, but as much as the momentum might be to the downside, this selloff might be getting out of hand. Nike stock cratered after it did a face plant with orders for future delivery when it reported quarterly results earlier this month.

The market also remains worried about margin-crushing levels of bloated inventory. The important point is that Nike is committed to digging its way out.

Here’s Trevor Edwards, NKE brand president, on the last earnings conference call:

“We also made great progress against clearing excess inventory within the quarter and we’re seeing the benefit of bringing new product into the clean, full price in-line channels. Looking forward, we will continue to manage the flow of product into the market as we expand on an already healthy in-line marketplace.”

This is a work in progress, to be sure. Investors are going to have to wait well into 2017 for proof that the inventory woes are at last behind Nike. As for disappointing future orders, they increasingly correlate less and less with revenue growth because NKE’s direct-to-consumer business is growing so rapidly.

In other words, Nike’s problems are real, but probably not as bad as the stock performance would suggest. It’s also no UA stock, which plummeted in large part because of a very rich valuation. NKE stock could offer a bit more compelling valuation, but it doesn’t look particularly over priced.

Nike Stock By the Numbers

Nike goes for almost 19 times forward earnings. That’s significantly more expensive than the S&P 500. However, NKE has far better growth prospects than the broader market. Analysts forecast a compound annual growth rate for Nike of more than 12% for the next half-decade, according to a survey by Thomson Reuters. A forward price-to-earnings multiple of 19 for that isn’t unreasonable by the valuation standards of today’s market.

NKE
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By relative valuation, NKE stock is getting cheaper by the day. The current P/E offers a discount of around 14% to its own five-year average, according to Thomson Reuters Stock Reports. By price-to-sales, shares are essentially in line with their long-term average.

Nike doesn’t scream “bargain buy” at such levels, but it does suggest that the bottom is closer than pessimists think.

The 52-week low and a 200-day moving average are declining, with bias on the downside, but at some point, NKE shares will get so cheap that buyers can’t resist stepping in. At the same time, Nike stock is entering oversold territory.

A long history of market outperformance and a return on equity of 30% say Nike is a high-quality stock that’s fallen on some hard times. We’re talking about a stock that generated levered free cash flow of about $2.4 billion over the last 12 months. That’s an impressive level for a company with $33 billion in revenue over the same period — especially one that makes sportswear and apparel.

The bear case for Nike stock is well worn. Rivals such as Under Armour, adidas AG (ADR) (OTCMKTS:ADDYY) and Puma SE NPV (OTCMKTS:PMMAF) are stealing market share, especially in NKE’s most important market of North America. Although performance matters, fashion is becoming increasingly important, and that has been giving an edge to Nike’s rivals, the critics say.

You don’t have to minimize those concerns to argue that NKE stock might already be discounted for them and more.

Short-term share-price movements are notoriously hard to call, but don’t be surprised in Nike stock is bottoming out this week.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/nike-inc-nke-stock-looks-ready-bottom-out/.

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