On Wednesday, Morgan Stanley and UBS joined several other investment firms that have recently lowered their price targets on Nike due to the impact of COVID lockdowns in China and the overall stock market correction.
Shares of Nike have fallen 33% this year to close Tuesday at $110.72 after starting the year at $165.88.
Nike will report results for the fiscal fourth quarter ending May after the June 27 close.
Morgan Stanley retained its “overweight” rating on Wednesday while cutting its price target to $159 from $192.
In a note, Morgan Stanley analyst Alex Straton said the longer-than-expected COVID-related lockdowns in China that began in March would likely cause Nike to miss its implied guidance for its fiscal fourth quarter, calling to low single-digit growth.
Morgan Stanley is now expecting a 5% quarterly drop, worse than the recently updated sell-side consensus forecast calling for a 1% drop on concerns over China’s slowdown.
With the updated sales target and slightly lower gross margin target due to lower-than-expected China sales and higher-than-expected freight charges, Morgan Stanley now expects 72 cents per share for Nike in the fourth quarter, down from a previous estimate of 84 cents and the Wall Street consensus target of 84 cents.
For Nike’s FY22 year, Morgan Stanley cut its EPS estimate to $3.57 from $3.71. For FY23, EPS estimates were reduced to $4.34 from $4.46.
Straton said the recent weakness in Nike shares could indicate that the stock’s valuation reflects a fourth-quarter failure and a lower-than-consensus FY23 guide. The concern, however, is whether FY23 turns into “another ‘transition’ year” before Nike can return to its long-term growth targets.
Straton wrote, “We continue to believe that COVID has permanently accelerated NKE’s transition from a traditional wholesale business to a digital, direct-to-consumer (DTC) brand; This should lift its revenue, margin and EPS growth trajectory over time and subsequently enable multiple expansion from pre-pandemic levels. »
However, China’s “unprecedented supply chain/macro-environmental pressures shutdowns may deter Nike from achieving linear growth consistent with its long-term growth LT objectives in 4Q22 and for fiscal 2023. »
Straton believes the catalysts for the stock include sequential quarter-over-quarter revenue improvement in China and further evidence of margin benefits from its DTC push in other geographies, particularly in North America and Europe. Straton wrote: “Faced with the upcoming forecast reset and valuation levels below pre-pandemic levels, we believe current levels could offer an attractive entry point for long-term minded investors looking to invest. in a quality asset for sale.
In a note released Wednesday, UBS cut its price target on Nike to $168 from $173, but kept its “Buy” rating on the stock.
UBS analyst Jay Sole wrote that he thinks Nike will likely beat its forecast when it reports results on June 27. , based on his conversations with investors, is below $4.
“We believe a better than expected forecast drives Nike’s P/E up 24x. The options market is looking for a jump of +/-6.4% from the event against a historic average move of 5.2 We expect more volatility than 6.4%.The main risk is new, large lockdowns in China will emerge by the date of Nike’s report on June 27. This and high macroeconomic uncertainty are two reasons additional ones for which we see the potential for high volatility,” Sole wrote.
The analyst then explained four reasons why his forecast beat expectations. These include:
- Nike’s outlook in China is not as bad as feared,
- The strength of Nike in the rest of the world being underestimated,
- run-in factory closures in Vietnam last summer, which facilitates comparisons, and
- Nike’s shift to the “next phase” of its go-to-market strategy likely leads to better-than-expected wholesale channel growth in FY23.
“Our conversations suggest that Nike’s challenges in China are widely understood, and sentiment around this issue is very low. We feel that the ‘good’ news regarding China will help lift a major overhang around the title,” Sole explained.
Other investment firms have also adjusted down Nike’s price targets in recent weeks. On June 14, HSBC lowered its price target to $132 from $140 while maintaining its “Hold” rating. On June 13, Guggenheim reduced its price target on Nike to $160 from $195 while maintaining its “Buy” rating. On June 6, Stifel lowered its price target to $150 from $160 and retained its “Buy” rating. On June 1, Wells Fargo lowered its price target to $150 from $165 while maintaining its “overweight” rating.