Nike stock: beware of expanding valuations

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NOTas (NKE) needs no introduction. The company’s brand is one of the most recognizable and valuable in the world, with virtually everyone owning some of its products at some point in their life.

NIKE’s offerings can be divided into six main categories: running, NIKE basketball, the Jordan brand, football (soccer), training and sportswear (its lifestyle products inspired by the sport). The company is also involved in other sports and outdoor activities, although these account for the majority of its income.

Nike has always rewarded its shareholders with high returns, primarily through consistent growth, as well as dividends.

Unfortunately, while Nike enjoys a large moat and is a slot machine that is likely to continue to create long-term shareholder value, the stock’s valuation has recently reached unattractive levels, in my view.

For this reason, I am neutral on the title. (See Top analyst actions on TipRanks)

Recent results, capital returns

At the end of September, Nike released its first quarter 2022 results for the period ending August 31. Revenue was $12.2 billion, 16% higher year-over-year, or 12% higher excluding currency effects.

Additionally, the company achieved growth across all channels, with NIKE Direct (direct-to-consumer or DTC) growing 25%. Net income was $1.87 billion or $1.16 per share, compared to $1.52 billion or $0.95 per share for the same period last year.

Gross margins increased by 170 basis points to 46.5%, driven by margin expansion following DTC sales growth, a higher mix of full price sales and favorable exchange rate movements.

These were partially offset by high product costs, primarily due to increased transportation costs (i.e. the ongoing supply chain crisis).

In November, Nike increased its DPS by 10.9% to a quarterly rate of $0.305, which marked its 20th consecutive annual dividend increase. The company has also rewarded its shareholders through share buybacks. The company would repurchase about $5 billion in stock a year before the pandemic.

Buybacks slowed last year, but have gradually picked up. The company repurchased about $752 million last quarter.

Evaluation

While Nike is a high-quality company that should continue to dominate its industry for decades to come, I’m increasingly concerned about the stock’s valuation.

Nike is currently trading at a forward P/E of 47.9, which is too rich in my opinion. For context, Nike shares have historically hovered at a P/E between 20 and 30. As a result, recent expansion could potentially limit total shareholder returns going forward.

The stock’s current dividend yield is a meager 0.7%. Assuming redemptions were to resume at a rate of approximately $4 billion per year, this would translate to a “redemption yield” of just 1.5%.

As a result, investors are subject to rather low capital returns at the stock’s current levels, which are not sufficient to offset any compression in valuation towards the stock’s typical valuation levels.

The Taking of Wall Street

As far as Wall Street is concerned, Nike has a Strong Buy Consensus Rating based on 18 Buys and four Holds assigned over the past three months.

At $183.71, Nike’s average price target implies an upside potential of 11.1%.

Disclosure: At the time of publication, Nikolaos Sismanis had no position on any of the stocks mentioned in this article.

Disclaimer: The information in this article represents the views and opinions of the author only, and not the views or opinions of TipRanks or its affiliates. Read the full disclaimer >

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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