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Nike Inc (NKE) Stock Is Much Less Frightening Than You Think

Nike Inc (NYSE:NKE) is running on fumes this year, but seems it seems to have found a bottom. However, that doesn’t mean Nike stock is ready to run just yet.

NKE’s competitive position isn’t as dire as the chart would have you believe. But it does have its work cut out for it. Getting straightened out is going to take a quarter or two at least.

Nike stock is off 18% so far this year on a well-worn story — killer competition. 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. UA snatching Stephen Curry as a pitchman has done wonders for its fortunes at NKE’s expense.

The Core of NKE’s Struggles

It’s also true that although performance matters, fashion is becoming increasingly important. That’s giving an edge to Nike’s rivals, the critics say.

NKE now finds itself with too much inventory, which is something investors hoped would largely be cleared up by now. No such luck and excess inventory continues to pressure margins.

In short, the market has good reasons for being pessimistic about Nike stock for now. At the same time, it may not be underselling NKE’s rebound potential. At some point, Nike stock is simply too cheap to ignore if you believe it can work out of these issues.

That seems like a solid bet. NKE stock still dominates the markets in which it competes. Presumably, it can address its issues through marketing and design. It’s unlikely that Nike suddenly became uncool.

At the same time, NKE 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 LLC (NYSE:APO). 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.

And yet it’s almost as if the market is throwing up its hands on something less than a 180-degree turnaround play.

Nike Stock’s Value Proposition

Worries about inventory, margins and orders for future delivery are being discounted in Nike stock almost as if they’re insurmountable. But we already know that Wall Street has been far too pessimistic on what NKE 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.

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Sentiment was worse than the results. That has helped make Nike stock more attractive at current levels. At this time last year, NKE changed hands at more than 32 times trailing earnings. Today it goes for 23.

On a forward-earnings basis, Nike stock is valued at 19 times earnings. That’s not unreasonable for a name with a compound annual growth forecast of 12%. NKE shares are also trading at a discount to their own five-year earnings multiple on a forward basis.

The technicals look like they’ll be playing role in the short-term. If Nike stock can break resistance at its 50-day moving average, it should have a little bit of steam through the end of the year. If not, well, it could very well hang around current levels for a while.

Longer-term it is a different story.

NKE has been through tough time before and while it was doing so, it was cheap. Do you think Nike stock will be lower or higher a year from now? Keep that in mind before you dismiss NKE stock.

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

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