Shares of Nike Inc (NYSE:NKE) just haven’t done it in 2016. Nike stock has dropped from $62 at the start of the year to just $51 now. Nike stock sits near new 52-week lows. And short-selling interest has spiked, with short positions up 150% recently against NKE stock.
The company’s woes are apparent. Margins are dropping. Stephen Curry’s success has hit the basketball franchise. And the company simply hasn’t grown fast enough to back up its formerly premium valuation. But with Nike stock down 17% this year, it looks more interesting. Has NKE stock fallen far enough to justify a purchase now?
With that as a backdrop, here are three pros and three cons to Nike stock.
Nike Stock Pros
Dominant Player: For all the talk of competition this year, NKE still rules its industry. The company controls 23% of the global athletic footwear market as of 2015. No other player even topped 10%. Adidas AG (ADR) (OTCMKTS:ADDYY) comes in second place, but with only 9% of the market. Nike’s size allows it great economies of scale. It has the best athlete endorsements, the most sporting teams partnerships and ideal placement at the Olympics.
Even with 2016’s road bumps, NKE is targeting $50 billion in revenues by the year 2020. The company is currently on a $33 billion run-rate, suggesting that the company sees the potential for 50% top-line growth over the next four years. That’s tremendous.
Big Dividend Hike: Few people buy Nike stock for its dividend. Even with the company’s newly announced 12% dividend hike, NKE stock still yields a pedestrian 1.4%. However, we should look past the present yield.
Over the last five years, Nike has grown its dividend at a 16% annualized rate. Anyone who bought Nike stock five years ago is now receiving a dividend of greater than 2.5% on their purchase price. Like many great growth companies, Nike’s current dividend seems minuscule, but for long-term stock owners, it will build up quickly. Additionally, the company currently operates at just a 22% dividend payout ratio. This means that it has plenty of room within its earnings to keep growing the dividend at double-digit rates.
Discounted Valuation: Nike’s price-to-earnings ratio is down to 23 now. This is the lowest it has consistently traded at since 2013. This now leaves NKE as cheap or cheaper on an earnings basis than its immediate competition. Adidas trades at 28x earnings. Under Armour Inc (NYSE:UA) is at nearly 70x earnings. And Puma AG Rudolf Dassler Sport (OTCMKTS:PMMAF) trades around 55x.
In recent quarters, Nike stock has generally traded above 25x earnings; it now sits at a discount to both its own history and its competitors.
This gap comes since many of NKE’s competitors have had a strong 2016. Under Armour made a huge move snapping up Curry and other young talents out from under Nike’s nose. And Adidas is scoring with trendier styles that are making in-roads with the teen consumer segment. However, NKE’s longer-term dominance is unquestioned, and at a discounted valuation, it looks like a good fit compared to its competitors.
Nike Stock Cons
Basketball Franchise Under Fire: Nike has long ruled the basketball shoe market. It has been many years now since Michael Jordan retired. But that hasn’t dimmed his marketing power. Jordan shoes remain the dominant brand, and NKE stock holders have cashed in.
But that hegemony is now challenged. Under Armour grew shoe revenues as much as 58% year-over-year earlier this year, powered by Curry’s dominant performance. Steph Curry appears likely to be at or near the top spot for shoe sales by active NBA players going forward. On the plus side for Nike, Curry’s latest shoe, the Low Chef, appears to be underperforming.
Under Armour stock has sold back off, as Curry sales have slowed down. But regardless of what happens with Curry, Nike needs to make sure it doesn’t miss signing more game changing stars in the future.
Margins Down: The competition has hit Nike in one important area: profit margins. Its Q3 2016 operating margin fell to 45.5%, down 2 full percentage points from last year’s same-quarter figure. The company is struggling not just with its industry opponents. It also has to overcome an ever-strengthening U.S. Dollar. In recent years, NKE has relied on international sales for an increasing portion of its growth agenda. That has come under fire as the U.S. dollar surges, hurting the company’s competitive position and also devaluing the revenues earned in foreign currencies.
While NKE stock’s growth is great, and it still has plenty of growth left, growth at the expense of margins scares a lot of people. Nike needs to prove to investors that it can overcome the rising competitive pressures and the strains placed on it by a surging U.S. dollar. On the plus side, NKE stock should benefit from President-elect Trump’s plan to allow U.S. companies with large international cash balances to repatriate money at a low tax rate.
Trump Trade Threat: It’s not all good news for Nike stock on the Trump front. Trump’s signature issue has been trade reform, cracking down on supposedly “broken” trade agreements. As part of this, Trump has talked of installing massive tariffs on goods from certain foreign countries. The biggest target would be China, since that country runs a large trade surplus with the U.S.
NKE relies on China for much of its manufacturing capacity — a 40% tariff on its imported shoes to the U.S. would be a massive detriment. And Nike could lose sales on the China side of the equation as well. China has been a boom market for NKE since the 2008 Beijing Olympics gave the company a golden marketing opportunity there. China now makes up more than 10% of the company’s overall sales; however weakening ties between the U.S. and China could alter the company’s trajectory there.
Bottom Line on NKE Stock
There’s a lot to like about Nike stock. It’s one of the fastest-growing U.S. mega-cap companies. Out of the 30 Dow Jones Industrial stocks, you could hardly pick better if you wanted to focus on explosive growth prospects. And with NKE stock near 52-week lows on what should be temporary competitive issues, this could be a great entry point.
But watch the Trump administration closely; its actions on trade and the U.S. dollar will play a heavy role in Nike’s fortunes over the next couple of years.
At the time of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
