Fans of Greek mythology know Nike as the goddess of victory, and winning usually describes both Nike (NYSE:NKE) stock and the company itself. Recently, though, the U.S.-China trade war has hurt Nike stock. However, strong product development and marketing have delivered decades of gains with few interruptions.
Those who buy NKE stock should win in the long-term no matter when they buy. Still, profiting in the short term requires a sense of timing. Investors should always weigh headwinds against the company’s products and marketing before pulling the trigger.
Outside Forces Will Hurt NKE Stock, but It Should Bounce Back
Without question, the U.S.-China trade war has impacted Nike stock in recent trading sessions. Though NKE has still risen for 2019, it has fallen by almost 10% from the 52-week high set in mid-July. It is hardly immune to bearish pressures. Its last one occurred in 2016.
Moreover, the yield curve inverted earlier this month. In past economic cycles, this has signaled a looming recession. While economic expansions do not have to end in theory, the average expansionary period since 1945 has run for less than five years. Considering that the current economic cycle began more than ten years ago, a recession remains a looming risk factor.
Still, NKE stock has long served investors well. Falling to a low of $9.56 per share in 2009, it has now risen by more than nine-fold. Moreover, it has long maintained a healthy price-earnings (PE) ratio. The average PE over the last five years has come in at 34.74. Even during the financial crisis, this metric consistently stayed above 20. With a current PE of about 33, it trades close to normal levels amid a trade war.
For now, the forward PE ratio stands at about 24.2. Analysts also forecast earnings increases of 16.5% in this year of 2020 and 16.9% next year. This factors in the effects of the trade war. Earnings estimates for the year stand at $2.90 per share. This estimate was $3.02 per share 60 days ago, but I see profits holding up well despite more challenging conditions.
Marketing also remains on point. As William White points out, Nike has introduced the Nike Adventure Club. For a subscription fee, this will allow parents to get their kids’ new shoes between four and 12 times per year. This provides a huge benefit to parents with fast-growing children who seem to always need new shoes.
Nike Well-Positioned to Weather Political Storms
Nike should also continue to mitigate the politics of its business. As Dana Blankenhorn argues, Nike does not depend as heavily on China as some might think. To make this point, he cites the Nike Manufacturing Map, which shows activity in 41 countries. It also points to increased activity in places such as Vietnam, Cambodia, and Indonesia.
About 18% of Nike’s manufacturing now occurs in China. Hence, Nike looks better-positioned than peers such as adidas (OTCMKTS:ADDYY) and V.F. Corporation (NASDAQ:VFC) when it comes to its involvement in the People’s Republic.
Nike stock has also defied predictions about the Colin Kaepernick ad. These ads infuriated millions of Americans. Still, contrary to the belief of some, both revenues and the share price have risen despite this anger.
Nike bases itself in Beaverton, Oregon. However, this North America base only accounts for about 42.7% of Nike sales. From that standpoint, it makes sense that Nike stock could absorb the fallout from such a controversy.
Should I Buy Nike Stock?
Nike stock remains a long-term winner. However, the company faces considerable headwinds at this time. Nike continues to stay well-positioned to minimize the effects of the trade war. Still, I would not expect total immunity for NKE stock. Moreover, if predictions of a recession prove true, NKE could struggle for some time to come.
Still, investors need to take any negativity about Nike stock with a grain of salt. NKE stock is in no way a sell. Even if the worst fears about trade wars or recessions come true, I would not expect NKE to become cheap. Investors should view the prospect of a current PE ratio below 20 as highly improbable. If the current valuation falls below 25, investors should buy.
Investors will probably profit in the long run regardless of when they buy Nike stock. Although nobody should expect to buy NKE on the cheap, they might do better than the current 33-times earnings.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.