What Bargain Hunters Need to Know About Nike Stock

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Nike’s fiscal fourth quarter was better than expected. But he was cautious with his outlook.

Andrew Redington/Getty Images for the Premier League

Like an inverted swoosh,

Nike
it is

the post-earnings recovery quickly came back to earth as the market reacted to the athletics giant’s pessimistic financial forecast. Bargain hunters need to know what their end goal is.

After regular markets close on Monday,

Nike

(ticker: NKE) reported a better-than-expected fourth fiscal quarter, despite continued weakness in China, and announced a new four-year $18 billion share buyback plan.

Still, the stock, which initially rose on the news, gave up its gains following the company’s conference call, in which management said it expects revenue from its current fiscal quarter are flat or slightly up from $12.25 billion a year ago. . Consensus calls for sales to climb to $12.34 billion.

Still, shares are down 4% in recent trades, far less than the steep double-digit declines seen in some other consumer names that haven’t provided a rosy outlook this earnings season.

This is probably partly due to the fact that

Nike

the stock has already slipped about a third year to date through Monday’s close, so a healthy dose of pessimism was already present. But beyond that, it could also reflect that the lower forecast was widely anticipated to some extent, and sets a more reasonable baseline moving forward.

“Over the past ten days, you’ve seen this mad dash” to drive down estimates, says Kevin McCarthy, portfolio manager of the


Next Generation Connected Consumer from Neuberger Berman

exchange-traded fund (NBCC). “The best-case scenario was a pretty shitty quarter, where you were looking up the kitchen sink in terms of advice…while hearing them reinforce the underlying message about their direct-to-consumer business and China.”

On this point, Nike did not deliver a slam dunk. The company and its partners appear to have more inventory to clear in China, and those who hoped its DTC business would further insulate margins likely wanted more.

A weaker outlook for China is worrisome, given that U.S. sales are likely to come under some pressure as Americans grapple with high inflation and prioritize experiences over clothes. So, with stocks changing hands at 25 times forward earnings, roughly halfway between their five-year average of 31 times and their low of 19 times, the question is whether that number can rise. a lot from here.

The valuation is the main sticking point for CFRA analyst Zachary Warring, who maintained a sell rating on Nike despite calling it a “world-class brand”. It argues that it “has experienced significant multiple expansion during the pandemic, which we expect to return to pre-pandemic levels as margins come under pressure.”

At the same time, there was a lot of good news during the quarter. Nike’s business in China did not decline ahead of expectations, forecasts were likely conservative and inventories do not appear to be of concern: the company noted that outside of China, demand exceeded supply for three quarters consecutive.

These factors, along with now-lowered expectations, could secure the company’s success in its 2023 fiscal year. That’s the thesis of Baird analyst Jonathan Komp, who maintained an outperform rating on the stock while lowering his price target from $10 to $140. “Based on positive brand momentum (seeing no change in consumer behavior), prices… the strength of DTC and the potential for a stronger recovery in China, we see several paths to the rise.”

Still, the big question is when will this rise take place and how long investors are willing to wait – and the answer will differ from shareholder to shareholder.

Overall, Nike “made me want more, but maybe that doesn’t matter because I’m not the extra shopper,” McCarthy says. “The additional buyer has been sitting on the sidelines waiting for Nike to be fully de-risked. On this brand, the stock is probably there; the question is how much are you playing at the moment.

His back-of-the-envelope calculations show that Nike could still earn about $4 a share this fiscal year — consensus calls for EPS of $3.90 — putting $5 of EPS on the table for next year. After all, Nike has “an above-average track record” and made its “first real comments in two and a half years” on innovation.

Still, McCarthy doesn’t think there will be a rush to buy the dip, with enthusiasm potentially building in the quarter.

That could be said of a lot of consumer discretionary names, which have been beaten in recent months but continue to content themselves with considerable investor caution.

Or as BofA Securities analyst Lorraine Hutchinson put it, Nike isn’t “out of the woods yet.” At least the trail through the trees is getting clearer.

Write to Teresa Rivas at [email protected]

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