Nike (NKE) stock is hitting all-time highs after Nike earnings blew past Wall Street estimates, and there looks to be more gains ahead.
Nike stock is now up 30% for the year-to-date in an otherwise crummy year for equities. Even better, Nike stock is powering ahead thanks to China, which has been the main culprit for this year’s broader market slump.
Higher prices are also powering NKE, which is no mean feat when inflation is muted and the higher U.S. dollar makes domestic exports pricier overseas.
But what investors really loved about Nike’s earnings was its forecast. Nike’s global orders for future delivery — a measure of demand — jumped 9%. Excluding the effects of foreign currency exchange, futures orders would have grown 17%.
Pretty much everything is going right for Nike stock. It’s the world’s largest maker of sports footwear and apparel at a time when they’re fashionable in an everyday sense — no trip to the gym necessary.
It also happens to be one of the world’s most recognized brands.
To get a sense of how well Nike is doing, much of the quarter’s strength came from China, which has become one of the biggest macroeconomic headwinds for U.S. multinationals. The slowdown in the Chinese economy is laying waste to wide swath of equities in the materials and industrial sectors, among others — but not Nike.
As CFO Andrew Campion said on a conference call with analysts:
“While we are very mindful of the macroeconomic volatility in China, our brand has never been stronger and our marketplace has never been more healthy.”
Indeed. Nike’s sales in China soared 30% over the course of the quarter to $886 million.
Nike Stock: Ready for Year-End Run
Taken all together, Nike earnings came to $1.18 billion, or $1.34 a share, which was a massive earnings beat. Analysts, on average, were looking for earnings of just $1.19 a share, according to a survey by Thomson Reuters.
Revenue also exceeded forecasts by a wide margin, growing 5 percent to $8.4 billion vs. an estimated $8.2 billion.
Higher-priced new products are resonating with consumers, especially younger shoppers, thanks in part to Nike’s successful use of social-media marketing. In turn, that drives margin expansion, thanks to higher average selling prices.
At this point, you’ve got to like Nike heading into the end of the year no matter how pricey it appears. A forward price-to-earnings multiple of 26 represents a significant premium over Nike stock’s own five-year average, according to Thomson Reuters Stock Reports. It’s also arguable that it’s too high for NKE’s growth forecast.
But valuation is more of a concern for longer term. After all, it can take a long time for the P/E ratio to revert to the mean. In the shorter term, there’s nothing holding Nike stock back — operationally or in terms of market psychology.
There are precious few mega-caps putting up the really big gains this year. That alone makes a case for NKE. Just watch as investors chase performance in an effort to salvage their portfolios before a bad year for stocks comes to a close.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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