Nike Stock: Reasonable Valuation, Q3 Earnings, Solid Performance

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Nike (NYSE: NKE) the stock may have been punished in the early months of 2022 – but its business, not so much. The Oregon-based sportswear maker released fiscal third-quarter results on March 21 that beat expectations for both revenue and EPS, as the company has done in fifteen of the past twenty quarters.

Nike reminds me of Apple (AAPL) in several ways: the company has a reputable brand that never fails to create consumer demand, while the management team has proven to be exceptional at executing even in times of distress. For this reason, coupled with valuations that are (finally) no longer stretched, I think Nike is a solid buy after the company’s last day of earnings.

On Nike’s third quarter 2022 results

When it comes to headline numbers, Nike did not disappoint. For starters, diluted EPS of $0.87 was down slightly year-over-year, but the figure still topped analyst consensus by a respectable 15 cents.

Non-currency revenue growth of 8% was robust, despite numerous headwinds which included supply chain challenges and a weakening Chinese economy. But better still, it was also buoyed by the strength of nearly every major geographic and product segment, with the exception of Greater China apparel and footwear – the company’s sole areas, accounting for a fifth of the company’s total revenue, which saw the high end shrink. See table below.

Nike’s DTC channel impressed, with ex-FX sales growing 17% this time around. Nike brand digital soared even better by 22% year-over-year, while Nike mobile grew more than 50%, according to CEO John Donahoe. This is good news, in my view, as Nike continues to do its best in channels that provide the company with better inventory control and richer margins. Wholesale revenue, always the biggest piece of the mix, have only increased by 1% and show clear signs of a ceiling that is more likely secular than cyclical.

Nike revenue by sub-segment, Q3 2022

Nike revenue by sub-segment, Q3 fiscal 2022 (Nike’s IR page)

Partly due to the change in revenue mix described above, but also due to lower markdowns, gross margin increased by 100 basis points year-on-year. Investors looking for companies that retain pricing power and are able to weather the challenges of consumer inflation should take note.

The growth in turnover and the strength of the gross margin were offset by significant operating costs which increased by 13%. Nike has traditionally been aggressive in spending lavishly on marketing and innovation, at least since the 2017 launch of its “direct-to-consumer offense” strategy.

Diluted EPS could also have been better had it not been for a five percentage point hike in the effective tax rate which I estimate shaved five cents a share off Nike’s third-quarter net income. fiscal quarter.

Valuation of NKE shares

I’ve been supportive of owning Nike since at least late 2018. In my view, the investment case is supported by some of the same factors that also make me an Apple bull. They were even mentioned during Nike’s earnings call: “brand momentum, culture of innovation and proven operational playbook”.

The problem with the stock, in my opinion, has always been rich valuations. After bottoming out in March 2020, Nike’s P/E for the next year shot up 40x at the start of 2021 and stayed close to those levels for the following months. This was also around the time most growth stocks peaked. Justifying the rise to these levels has become increasingly difficult.

The good news for potential investors is that Nike’s price and valuations have sufficiently de-risked since then (see below). This happened without the fundamentals of the business deteriorating much, if at all. In fact, the current P/E of 28.4x coupled with long-term EPS growth projections of nearly 16% point to the PEG of 1.8x, which hasn’t been this reasonable since early 2020 at least. .

P/E ratio of NKE shares and long-term growth estimates
Data by YCharts

On March 14, just a few days ago, Nike hit 34% below all-time highs. In the past decade, it was only the second time the stock had experienced such a pullback – the COVID-19 bear, down 40%, had been the other example.

Since then, Nike has already climbed 8%, but remains around 25% underwater. Given the good results obtained, I think that the opportunity to buy “the apple of sportswear” on the decline and surf on a possible recovery is still on the table.

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