It’s painful to see that Nike Inc (NYSE:NKE) stock is down 20% for the year-to-date, but shareholders can take heart in the likelihood that Nike stock has bounced off of its bottom.
Sluggishness in the key North American market, inventory build up and sagging orders for future delivery have tripped up NKE stock all year. Disappointing results in the most recent quarter only solidified the bearish outlook on shares.
It’s not that bears don’t have a good case. Rivals such as Under Armour Inc (NYSE:UA), 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.
Adding to the uncertainty, Nike is still clearing a glut of inventory, pressuring margins. And then, of course, there are forex exchange headwinds that have only gotten stiffer on Brexit fears.
As it is with any stock, however, the most important piece of information is price. The central question comes down to whether Nike stock has discounted all the headwinds. Given the dramatic decline — and recent action — there’s reason to think it has.
NKE stock fell below $50 a share at the end of October in the wake of its quarterly earnings report. That’s a place it hasn’t been since the spring of 2015. Heck, that’s roughly a 25% decline from an all-time high reached at around this time last year. That represents a loss of roughly $25 billion to $30 billion in market value. That’s more than two UAs.
Is the future really that bleak?
Nike stock is losing market share to Adidas and UA, and vulnerabilities appear to be creeping up in the basketball segment. But NKE still dominates these markets. Presumably it can address these issues through marketing and design. It’s like Nike suddenly became uncool.
NKE Is Down, Not Out
At the same time, Nike is cutting costs. That’s one of Wall Street’s favorite moves. A couple of months ago Nike inked a supply-chain partnership with private-equity firm Apollo Global Management. That should address retailers’ concerns about product delays, as well as cut down on expenses.
It’s also seeing a pick-up among its retail partners.
Worries about inventory, margins and future orders are being treated like they’re insurmountable. And it’s clear that the Street has been far too pessimistic on what Nike stock can deliver on the top and bottom lines.
In the most recent quarter, Nike reported earnings per share of 73 cents. Analysts on average were looking for 56 cents a share. That’s a big beat. Revenue also exceeded the Street forecast.
None of this is to imply that a turnaround will be easy or quick, only that it looks more probable than the market seems to think. That helps Nike stock’s valuation, which has become unusually compelling.
At this time last year, Nike stock changed hands at more than 32 times trailing earnings. Today it goes for 23. On a forward-earnings basis NKE stock is valued at 19 times earnings. That’s not unreasonable for a name with a compound annual growth forecast of 12%.
Nike has always gotten a premium valuation in the past and it’s possible the market is saying it no longer deserves one. That seems premature. It’s also possible that this long slide in NKE stock is just a once overheated valuation cooling off.
The loss of Stephen Curry to Under Armour and Adidas’s relationship with Kanye West have taken some of the buzz away from Nike stock. Nike Inc is still a top global brand, however, that’s proven time again it knows how to market itself.
Don’t call this race over just yet.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
