(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Nike Inc. (NKE) have been on a strong streak over the past year, climbing almost 35% compared to the S&P 500’s rise of just 13.4%. Much of that gain came in 2018, with Nike climbing nearly 14%, while the broader S&P 500 rose just 2%. But the shares aren’t cheap, trading at their most expensive valuation in three years, meaning the stock could be bracing for a pullback.
Shares of Nike are currently trading around 26 times fiscal 2019 earnings estimates of $2.70 per share. The last time stocks traded at such a high valuation was in the fall of 2015, followed by a stock plunge of more than 25% and a flat stock price for nearly two years.
Nike’s one-year P/E peaked around 27 times in the fall of 2015. Leading to the high valuation, shares rose around 76% from around $37.5 to $66.25. This sharp rise was followed by a 25% decline over the next year to around $49.50. Over the period, Nike’s P/E multiple fell from around 19 to 27.5, back to around 18.
Earnings for the balance of fiscal 2018 forecast a decline of nearly 6%. Earnings growth is expected to accelerate in fiscal 2019 and 2020 by approximately 14.25% and 16.2%, respectively. Not fast enough to justify the high P/E multiple, once adjusted for growth, which gives it a PEG ratio of around 1.86 for 2019. But more worryingly, these future earnings forecasts have been revised at the decline over the past year. Since June 2017, estimates for fiscal 2019 have been reduced to $2.70 from approximately $2.90 per share, a decline of approximately 7%. Meanwhile, the forecast for 2020 fell from $3.30 to $3.15, a decline of 4.5%.
All of this, of course, doesn’t mean that Nike shares can’t continue to rally in the near term, because from a technical perspective, Nike shares have broken out. The chart shows two critical indicators that suggest the stock could rise further in the near term. The chart shows a bullish technical pattern, an ascending triangle, as well as the action crossing above a significant technical resistance level around $69.50, which signaled the breakout. The Relative Strength Index (RSI) has also trended higher and has yet to reach overbought conditions above 70.
Nike will likely release its fiscal fourth quarter 2018 results around the end of June, and by then investors will know if Nike’s stock is just too expensive or if it can still rise.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser and the manager of the firm’s actively managed long-term thematic growth portfolio. Kramer typically purchases and holds shares for three to five years. Click here for Kramer’s biography and portfolio holdings. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy described here. Upon request, the advisor will provide a list of all referrals made within the last twelve months. Past performance is not indicative of future performance.