Should You Buy Nike Right Stock Now? 3 Pros, 3 Cons

Advertisement

NKE stock - Should You Buy Nike Right Stock Now? 3 Pros, 3 Cons

Source: rodrigofranca via Flickr

Nike Inc (NYSE:NKE) stock just hit new all-time highs. But it did so without one of its long-time stars. Tennis legend Roger Federer’s Nike contract expired earlier this year. He went onto the court wearing gear for his new business partner. Uniqlo snagged him for a reported $300 million in guaranteed incentive money, ending Federer’s more-than-20-year partnership with Nike.

As it goes in life, all good things come to an end. With NKE stock up sharply over the past year, should investors consider breaking up with Nike as well? Or is the recent earnings report strong enough to keep the bull case in play? Let’s take a look.

NKE Stock Cons

Sector Remains Competitive: NKE stock is not the only one springing back to life lately. Other athletic-wear players have seen their stocks come back due to the combination of a rebounding North American market and improving foreign exchange conditions. Lululemon Athletica inc. (NASDAQ:LULU) is up 50% to new all-time highs recently. Under Armour Inc (NYSE:UAA) has doubled off its 52-week low and is now back up to $22/share.

That’s not to take away from Nike’s performance. Management has done a good job getting the company back on track. But realize that much of the gains are the result of improving market conditions, rather than company-specific wins. Foreign exchange, which is largely out of Nike’s control, provided a significant boost this quarter and should continue to do so later in 2018. Right now, margins are rising across the industry, but that trend shouldn’t be expected to continue indefinitely.

Expensive Stock: Unfortunately for value investors, NKE stock is now well out of a reasonable target range to buy the stock. NKE stock is now up to almost 30 times trailing and 25 times forward earnings. That’s pretty aggressive for a company that should grow earnings around 10%-12% compounded over the next few years.

Some investors point to NKE stock as a powerful dividend-growth investment play. But with the recent rally in Nike shares, the starting dividend yield is back down to 1.0%. It will take a lot of dividend growth in coming years for Nike stock to start providing a reasonably attractive yield.

China Market Is A Risky Growth Pillar: Nike needed to achieve three things to get its stock price up to fresh all-time highs:

1) Fix the North American market performance.
2) Keep international sales humming.
3) Put up more strong direct-to-consumer numbers.

They achieved all that this quarter.

The China market, however, is an ongoing concern. The Chinese Yuan just experienced its worst one-month sell-off in many years in June. A primary China ETF, Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) is down nearly 30% since its highs at the start of the year. Investors can’t ignore it: Trump’s trade war rhetoric is becoming a problem for companies with major China exposure. Nike is currently obtaining stellar results out of China, but this dream market could fizzle out rather quickly.

NKE Stock Pros

Strong Earnings Momentum: Nike has rebuilt its growth story after several years of stagnation. NKE stock has broken out to new all-time highs — and it’s not hard to see why.

Nike has managed two important feats. First, Nike has turned around its core North American market. It posted positive sales numbers after a 6% decline in the previous quarter. That, combined with continuing its strong pushes in the digital and international markets, has Nike rolling again. Nike managed 25% growth in China along with more than 40% gains from its digital sales channel. The digital gains are particularly nice, since they also tend to boost the company’s margins.

Expect More Strong Results: For awhile, it appeared that Nike had lost its way. It appeared that competitors such as adidas AG (OTCMKTS:ADDYY) were pulling ahead. However, the company has reasserted itself as a force to be reckoned with, as this quarter showed.

That allowed Nike to raise guidance for full-year 2018. Previously, the company expected mid-single-digit revenue growth for the year. Now, they expect the figure to come in closer to 10%. Analysts are raising their outlooks for both 2018 and 2019, with bumps to profit margins and overall top and bottom line figures. If 2019 figures come in as expected, with high-single-digit revenue growth and earnings per share in the +12% area, you could make a case for NKE stock being fairly priced today (though it’d be a stretch to call it cheap, unless they report even hotter numbers).

Strong Management Structure: Nike’s founder (and billionaire many times over) Phil Knight remains on Nike’s board. And Mark Parker, who joined the firm as a designer in 1979, has been the CEO since 2006.

Since Parker took over, NKE stock is up from around $10 to $78 today. That’s an impressive run, and Nike has cemented itself as a powerhouse worldwide brand. Also nice for shareholders, Parker receives a relatively low base salary in the $1.5 million range, along with highly variable incentive compensation. Since Nike’s net income declined in 2016 and 2017, Parker had his compensation cut. Presumably, he’ll get a nice raise this year given Nike’s improving results, and that’s exactly as it should be for Nike’s shareholders.

NKE Stock Verdict

Nike is a great company with an outstanding management team and iconic brands. It is one of America’s most successful international exports, and as this quarter shows, the company has plenty of room for further growth. I said NKE stock was still a buy as recently as March — don’t mistake my caution for dislike of the company.

However, the easy part of the trade is over. NKE stock offered investors significant value in recent quarters. Now the stock is fully priced and arguably too expensive. Yes, Nike’s numbers are picking up, but so is the industry as a whole. That leaves Nike vulnerable if North America turns down again or the foreign exchange tailwind dries up. Additionally, Nike’s key Chinese growth market is at risk. NKE stock remains a top notch buy and hold investment, but don’t expect big things from it over the next 12-18 months.

At the time of this writing, the author held no positions in any of the aforementioned securities.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/should-you-buy-nike-right-stock-now-3-pros-3-cons/.

©2024 InvestorPlace Media, LLC