On Mar. 22, Nike Inc (NYSE:NKE) beat on fiscal third quarter earnings per share and revenue expectations. The results came just in time apparently, as the NKE stock price has been resistant to the broader market selloff.
This is looking pretty darn good compared to the ~4% fall for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), 3.5% fall for the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) or 5% tumble in the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).
Earnings per share of 68 cents came in 15 cents or 28% above analysts’ expectations. Revenue grew 9.9% year-over-year and came up a hair short of $9 billion, ringing in at $8.99 billion.
Here’s the thing about Nike: The stock may not be the cheapest name on the block, and the company may be navigating a changing retail environment. However, it’s a global leader with strong demand for its products. So long as the population continues to grow and consumers continue to exercise and enjoy sports, Nike will have sales.
Nike’s Blue-Chip Future
Speaking of sales, analysts expect revenue to grow just 4.4% for fiscal 2018, which we are three quarters of the way through. Next year, though, analysts expect sales to climb 7.1%.
While earnings continually come in ahead of expectations — beating estimates for at least 18 straight quarters — forecasts call for an 8.4% decline this year. Ultimately, I expect this number to come in better than forecasts are calling for. But still, an earnings decline isn’t very welcome.
What else are investors going to buy, though? Under Armour Inc (NYSE:UA, NYSE:UAA) is a concerning long-term investment for a number of reasons, and even though Lululemon Athletica inc. (NASDAQ:LULU) has been doing well — and just reported good earnings on Mar. 27 — it’s plagued by inconsistent performance.
Before the last few years, Nike had been a stalwart growth stock. It’s also been a stalwart dividend raiser. In fact, the company’s ability to generate dependable sales, double-digit earnings growth and double-digit annual dividend increases is what caused me to add it to my Future Blue Chips list.
Last November, management raised Nike’s dividend 11.1%, and it now yields 1.2%. Admittedly, it’s not robust. But the idea is to invest in a company that has solid growth now and is making its dividend a clear focus point.
Down the road, the growth will hopefully lead to a very low-cost basis for long-term investors, who can now collect a solid dividend yield since management has proven for years that it’s important for them to return capital to shareholders.
Trading NKE Stock
As we stated, Nike is a high-quality company, and that comes at a premium. NKE stock trades at 28.7 times 2018 earnings and almost 25 times 2019 earnings. It’s not exactly a bargain right now.
But the company is making efforts to keep up with the shift in retail. Its direct-to-consumer (DTC) business continues to see impressive growth, and its recent pilot program with Amazon.com, Inc. (NASDAQ:AMZN) could prove lucrative.
If an Amazon partnership comes to fruition, it could put Nike back on track for accelerated revenue growth. My only concern with Amazon is whether it will eat into Nike’s DTC business.
So how do we trade it?
The chart’s fairly simple, actually. After trading in a wide range between $50 and $65 for two years, NKE stock has finally broken out of it. The highest price target on NKE stock price sits at $80, held by Stifel Nicolaus analyst Jim Duffy. Should it get there, it would represent a rally of over 20% from current levels.
$80 is ambitious, so let’s take baby steps. Even a move into the low $70s would represent a 10% rally. So long as Nike stock stays above $64, bulls can stay confident. The trend is starting to improve, visible by its moving averages trending higher. NKE stock just needs to push through its prior highs to really jump-start a move higher.
And it definitely needs to hold support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
