If you have a long-term investment horizon and Nike stock is on your radar as a potential buy, now is the time to “just do it,” Wall Street analysts say.
They’re probably right, given Nike’s NKE,
ability to connect with consumers and its geographic reach in high growth areas including China and other emerging markets. I also recommended Nike in my Brush Up on Stocks letter for these reasons:
The biggest sports shoe brand in the world, Nike is the category killer for running shoes and basketball kicks. Through its design prowess and sponsorships, Nike crushes the competition with popular shoes such as Jordan, Air Max, Air Force 1 and perennial favorite Converse. Nike’s 2020 revenue of $37.4 billion was 35% higher than its closest competitor, Adidas AG ADDYY,
Nike ships approximately 800 million pairs of shoes per year. It also sells clothing and sports equipment. Footwear and fashion are tough categories because consumers are fickle. But Nike’s track record and profitability metrics show that the company has the skills to retain market share and pricing power. Here’s how Nike stacks up against competitors and similar apparel retailers:
Profitability, size and growth indicators
The 3% sales growth in the first quarter doesn’t look great. North America revenues were down 10% and Europe was also weak. But don’t dwell on it too much. This happened due to one-off issues: global container shortages and congestion at US ports, and lockdowns related to COVID-19. Nike forecasts 75% revenue growth in the second quarter as it weathers a weak second quarter of 2020.
Additionally, Nike is a reopening game that benefits from people’s desire to look good and exercise again coming out of lockdown. “The momentum of the Nike brand is stronger than ever,” says the company’s chief financial officer, Matt Friend.
In addition to continually inventing popular shoes, Nike performs a few tactical maneuvers to increase its profits. It goes direct to the consumer through digital sales as it narrows the number of retail partners to more prestigious names. That boosts margins by cutting out wholesalers and retailers, points out Jefferies analyst Randal Konik, who has a $192 buy rating and price target on the stock. In the long term, Nike wants to make half of its sales through digital channels.
Nike derives approximately 60% of its revenue from outside the United States As of summer 2020, it had 758 stores overseas and 338 in the United States. This gives investors exposure to higher-growth overseas economies, where sales to discretionary consumers are benefiting from an emerging middle class. tendency. Sales in China rose 51% in the first quarter, for example. “China is a huge growth opportunity,” says Konik.
Cash and cash flow
Having plenty of liquidity and cash flow helps businesses control their own destiny because they don’t need to depend on banks to fund their growth. Nike has an advantage here.
Famed investor Warren Buffett loves companies with protective moats. They create pricing power and prevent competitors from gaining market share. The power of the Nike brand places a wide moat around its business, notes Morningstar analyst David Swartz. “Nike has been the world’s favorite sportswear brand since the 1980s and will remain so for many years to come,” he says.
Nike derives its brand power from two other sources. The company sponsors many of the world’s most popular athletes including LeBron James, Kevin Durant and Michael Jordan in basketball, baseball stars Mike Trout and Giancarlo Stanton and tennis great Serena Williams.
Nike also employs a team of engineering, exercise, chemistry and design specialists to deploy technology that differentiates its footwear with features such as pressurized air and materials borrowed from the aerospace industry. Nike’s innovation allows it to maintain premium prices. Shoes such as Nike Air Vapor Max sell for around $200.
Valuation and performance of shares
Here’s how Nike stock compares to its competitors and the market using some common valuation metrics:
The opinion of Wall Street
Here is a summary of the opinion of Wall Street analysts polled by FactSet:
A strong US dollar would hurt Nike as the company generates a large portion of its profits overseas. Plus, consumers can be fickle, and you never know when they’ll catch on to new trends. Nike’s margins could come under pressure if commodity prices remain high or wages rise. Trade wars, tariffs and heightened tensions between the United States and China would also hurt Nike.
June 24 – Nike releases second quarter results after the close.
September 20 – Nike releases its third quarter results.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested NKE, DECK and CROX in his stock newsletter, Review actions. Follow him on Twitter @mbrushstocks
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