Nike (NYSE:NKE) stock looks like it is fairly valued. The stock has more or less fully recovered from its bottom earlier this spring. At the low, in the last week of March, Nike stock fell to $60 per share. But now it is back to about $100. And its first quarter 2020 high was $105.
The problem is, though, that at this price the stock does not really leave any bargain element for most investors.
The 23 analysts polled by Seeking Alpha estimate that on average earnings per share will rise to $2.23 by the end of May 2021. This represents earnings growth of 39% from this past year’s earnings of $1.60 per share. That is very impressive.
But, on the other hand, that increase is already baked into the NKE stock price. The forward price-to-earnings ratio is very high at 42 times May 2021 earnings.
Earnings per share estimates for the year ending May 2022 are for $3.28. That implies a year-over-year growth of 47%. In fact, over the next two years, analysts basically expect Nike’s earnings to more than double from this past year ($1.60 per share).
So, this is a classic trade-off. To buy earnings that will double, you have to pay a high price: 42x the first-year earnings, and 30x the second year’s earnings.
What’s Driving Growth
Most of what analysts expect is influenced by expectations that the U.S, Europe, and China will recover from the recession.
For example, China now seems to be in recovery, according to Nike. All of the Nike stores are now open there. Sales in China were up 8% year-over-year for the 12 months, and only slightly negative in the past quarter.
Nike does not break out what it calls “digital” growth, which relates to online sales. But the CEO did say that it had $1 billion in annual digital sales in China and EMEA. However, Nike said this was 79% higher than last year.
Moreover, in the Q4 earnings conference call on June 25, John Donahoe, president and CEO, said Nike would reach 30% “digital penetration” this year. This includes both its own distribution and its partners’ sales channels.
In fact, the company’s next goal is to reach 50% digital penetration. However, it did not give any time frame when it would reach that goal. This is significant since online sales typically come with higher operating margins than otherwise.
Play the Waiting Game
Cowen & Co. wrote a Buy report on June 1, according to Barron’s, based on Nike’s online sales compounding at 35% annually over the past five years. This is for sales on the sports shoe maker’s own site and its SNKRS app, which it launched in February.
Moreover, Cowen analyst John Kernan set his price target at $110 per share. But that is only 10% above the present price. And I have already pointed out that the price-to-earnings ratio is very high.
I suspect it might be more advantageous to wait for another pullback in Nike stock. That way, there could be a bargain element in the purchase price. In addition, you would still be buying all the expected growth at a more reasonable price.
Other online analysts online tend to agree with me. One wrote that he is “not running after the shares here.”
Historical Valuation Averages for Nike Stock
But here is one more reason not to buy Nike stock. This relates to its historical price-to-earnings range and average. Morningstar shows the P/E ratios each year for the past five years: Nike’s average over that period is 36.2x.
But I showed that the average estimate for this year ending May 2021 is 42x. The estimate for next year is 30x. The average over these two years is 37.5x. Therefore, Nike stock is overvalued according to its own multiple’s history.
Moreover, the same thing applies to its dividend yield history. Its average dividend yield has been 1.12% over the past four years. But right now Nike stock yields a lower amount, 1.0%. So, again it is overvalued compared to its own historical valuation.
That’s why I believe that most investors would be better off waiting for a bargain price before buying Nike stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
