Wednesday was not a pretty day for the market. The Dow Jones, S&P 500, and NASDAQ-100 all traded lower. But one stock that bucked that trend was Nike Inc (NYSE:NKE). The global athletic retail giant hosted its Investor Day conference and the market liked what it heard. Consequently, NKE stock shook off a broader selloff on Wall Street and rallied big.
The big news out of Nike’s Investor Day is that the company expects high single-digit annualized revenue growth over the next 5 years to drive mid-teens annualized earnings growth. Those are significantly better than expected. The Street was looking at mid single-digit revenue growth and high single-digit earnings growth over the next five years.
The aggressive targets are a vote of confidence from management in the company’s new Consumer Direct Offense initiative. The initiative, which is essentially a page right out of the adidas AG (ADR) (OTCMKTS:ADDYY) playbook, aims to streamline global investment, accelerate product innovation, and push direct-selling channels.
I’ve been pounding the table on NKE stock, saying that this initiative will yield handsome results for the company. Now, management is saying the same thing.
But NKE stock continues to trade at a discounted valuation. It certainly feels like the tide is turning, but there is still a long ways to go before NKE stock gets back to a fair value. As such, now feels like the right time to buy before the recovery.
Nike Is Getting Back To Its Winning Ways
I’ve said it multiple times on InvestorPlace before, so I don’t want to sound like a broken record. But here’s the short and sweet of why to buy NKE stock.
Nike is the athletic retail giant, and has been for some time. During its multi-decade stretch as king of athletic retail, Nike has proven one critical thing: although trends change, Nike always remains relevant. The brand has tremendous staying power.
Adidas has undoubtedly kicked Nike’s butt over the past 2 years. But that is about to change.
Adidas, like Lululemon Athletica inc. (NASDAQ:LULU) and Under Armour Inc (NYSE:UAA), is just a trend. Trends come and go. That means that also like Lululemon and Under Armour, Adidas’ red-hot popularity will cool and current sky-high growth rates will come down. When that happens, Nike’s popularity will once again soar and current low growth rates will go back up.
That is starting to happen now. With the Consumer Direct Offense initiative, Nike has leveled the playing field with Adidas. But Nike is far bigger, is more popular, has a significantly broader athlete portfolio and has more resources. It looks very likely that Nike will come out of its battle with Adidas as a winner.
This will likely happen over the course of the next 12 months. During that stretch, NKE stock should roar higher.
Nike Stock Is Still Undervalued
The bull thesis on NKE stock is pretty simply now that management has laid out a 5-year forward goal of mid-teens earnings growth.
Over the past 5 years, Nike has grown earnings at around 16% per year. During that time frame, the market paid around 26.3-times earnings for that growth profile.
Over the next 5 years, Nike is expected to grow earnings in the mid-teens range, so around that same 16%-per-year mark. But NKE stock currently trades at just 23.5-times trailing earnings.
That is nearly an 11% discount to the trailing 5-year price-to-earnings multiple, despite the same growth profile. That disconnect makes no sense and represents a compelling buying opportunity.
Throw a 5-year average 26.3-times multiple on this year’s earnings estimate of $2.33. You get a fiscal 2018-end price target of over $61. Throw it on next year’s earnings estimate of about $2.70. You get a fiscal 2019-end price target of $71.
Bottom Line on NKE Stock
NKE stock is getting back to its winning ways, thanks to the company pushing forward with its Consumer Direct Offense initiative.
Consequently, I think NKE stock heads towards $60 this fiscal year and $70 next fiscal year. I think that steady return profile makes NKE stock a must-buy at these levels.
As of this writing, Luke Lango was long NKE.