Nike Stock Bulls Might Be Sweating Through Earnings

by Joseph Hargett | June 25, 2014 9:12 am

Global sports apparel and equipment giant Nike (NKE[1]) will step up to the plate Thursday night to release its fourth-quarter earnings report after the closing bell, and investors will be focused on two things: guidance and World Cup soccer.

Nike NKE stock[2]
Source: Nike

For the record, Wall Street is expecting Nike earnings of 75 cents per share, down 1.3% from year-ago levels, on revenue of $7.34 billion, up 9.6% year-over-year. Historically, NKE has had little trouble topping the consensus estimate, having bested Wall Street’s targets in seven of the past eight reporting periods.

But, as last quarter revealed, Nike stock has been more responsive to guidance than earnings figures. Specifically, Nike posted a 13% rise in revenue and a 4% increase in earnings, yet NKE stock fell more than 5% in response thanks to poor growth guidance, with China emerging as a particular sore spot for the company.

Making the company’s growth forecast even more troublesome for NKE investors is that leading competitors Adidas (ADDYY[3]) and Under Armour (UA[4]) are experiencing none of the Nike’s headwinds. In fact, Adidas has seen revenue grow by 30% annually during the past five years, while Under Armour is growing even more rapidly (and on Nike’s home turf of North America).

There could be an unexpected bright spot for Nike, should the company’s soccer plans go well. With a goal of snatching market share from Adidas, Nike has invested heavily in advertising in World Cup 2014, including backing Brazilian star Neymar. If Brazil does well in World Cup, it could be a major boon for Nike.

Against this uncertain backdrop, Nike stock has attracted a wealth of optimistic sentiment. Analysts have handed out 18 “buys” versus only 10 “holds” and no “sell” ratings. Meanwhile, short interest is practically nonexistent for Nike stock. And NKE’s weekly June put/call open interest ratio of 0.22 reveals that bullish calls more than quadruple bearish puts among options set to expire at the end of the week.

nike nke stock chart
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Technically, Nike stock has rebounded from its May lows near $71, but the stock has pulled back from resistance near $77. The shares are currently perched on several key support levels, including the 75 area and NKE’s 50- and 200-day moving averages.

As such, a breakdown from here could have longer-term consequences for the shares.

With expectations so high, Nike will not only have to beat the consensus estimates once again ( places the whisper number at 78 cents per share, and a 10% rise in revenue is being batted around by many analysts), but guidance also will have to show signs of improvement. As such, there is a higher likelihood that NKE is headed for another dip before the situation gets better.

Options Trade on Nike Stock

Currently, June weekly implieds are pricing in a potential post-earnings move of about 4%, placing the upper bound at $77.97 and the lower bound at $72.03. As such, those traders looking to take advantage of a potential earnings-related drop in Nike stock might want to consider a July $72.50/$75 bear put spread.

At last check, this spread was offered at 91 cents, or $91 per pair of contracts. Breakeven lies at $74.09, while a maximum profit of $1.59 is possible if NKE closes at or below $72.50 when July options expire.

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

  1. NKE: /stock-quotes/NKE-stock-quote/
  2. [Image]:
  3. ADDYY: /stock-quotes/ADDYY-stock-quote/
  4. UA: /stock-quotes/UA-stock-quote/

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