Nike Inc: Is the NKE Stock Bull Run Over?

NKE has shown some weakness in 2016, but investors shouldn't be rushing to sell

The S&P 500 has climbed to new all-time highs this summer, but one of the hottest stocks in the world has not been in on the fun. After skyrocketing more than 500% in the 10 years prior to 2016, Nike Inc (NYSE:NKE) is down 9.6% this year.

Clearly the momentum stock seems to have lost its mojo in the short term. But is NKE stock’s 2016 swoon a buying opportunity or a sign that the bull run is over?

NKE Stock Appears Fully Valued

Even after its 10% pullback, NKE stock’s traditional valuation metrics all indicate that the stock isn’t particularly cheap or expensive. Nike currently trades at a price-to-earnings ratio of 26.1 and a forward PE of 20.5.

A large part of the stock’s meteoric rise in the past decade has been due to its incredible growth. Yet when growth is factored in, Nike stock’s PEG ratio is still a relatively high 1.68.

Nike stock’s forward P/E of 20.5 is much more reasonable than its peak at around 30 back in late 2015, but it’s far from the low end of the stock’s range since 2010.

NKE Stock Hits a Bump in the Road

In the most recent quarter, Nike delivered 6% year-over-year revenue growth, right in the middle of its 4%-8% growth range over the past six quarters. However, despite the fact that Nike’s earnings per share of 49 cents slightly beat consensus expectations of 48 cents, the number still represented 0% Y/Y income growth.

In each of the previous seven quarters, Nike had delivered 18%-28% Y/Y income growth.

Gross margins contracted 0.3% in the most recent quarter. Analysts expected a 0.6% expansion.

Nike management explained the margin contraction and the income pressures as the result of eliminating excess inventory.

In addition to flattening earnings, one of the growing concerns among NKE shareholders has been decelerating North American average sales prices (ASPs). Nike has in fact lowered price points on its KD and LeBron models in recent months, but a Deutsche Bank industry expert believes that Nike was simply too aggressive with its original prices.

The expert doesn’t see the price cuts as a sign that demand is falling. In fact, Deutsche Bank estimates that Nike’s fiscal Q4 North American ASPs were up 3.5% for apparel and footwear.

Nike Management Being Proactive

NKE bears argue that North American sales fell flat Y/Y this past quarter. However, Nike already generates 29% of its revenues from China, emerging markets and other high-growth international markets. Management is also investing heavily in these long-term international growth markets.

NKE is clearly willing to trim its business fat as well. The company shocked the sports world earlier this month when it announced that it will be discontinuing its golf equipment business. Why? NKE’s golf division saw the largest revenue decline (8.2 percent) of any NKE division in the past year.

Instead of wasting money and resources trying to turn the business around, NKE simply opted to focus on its better-performing divisions.

Time to Sell NKE Stock?

It’s always difficult to determine if one set of bad data points is simply an outlier or if it is a sign of even worse numbers ahead.

For now, it’s probably best to wait and see how NKE’s numbers look next quarter before rushing to judgment about the stock.

NKE stock is far from cheap at its current price. But until earnings growth, margin compression and ASP stagnation become trends rather than deviations, it’s probably too early to proclaim the NKE bull run over just yet.

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

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