Despite a decline of nearly 13% Nike
(NYSE: NKE) shares since the start of this year, we think Nike shares look fair at the current price of $90 per share. Although Nike’s stock is still 22% higher than it was at the start of 2019 and more than 46% higher than it was at the start of 2018 just over two years ago, Nike’s strong fundamentals, digital penetration and geographic diversification mean the stock is properly valued at its current levels. Our dashboard, ‘What factors have led to a 46.4% change in Nike shares between 2017 and now?‘ provides the key numbers behind our thinking, and we explain more below.
Part of the rise in stock prices over the past 2 years is justified by the growth of around 13.9% in Nike’s revenue, which grew from $34.4 billion in 2017 to $39.1 billion. in 2019. This increase was partially mitigated by a 200 basis point contraction in net profit margin from 12.3% in 2017 to 10.3% in 2019. However, share buybacks worth $8.5 billion made during this period contributed to a 4.7% reduction in the number of shares, which allowed earnings per share to remain stable over the period 2017-2019. Notably, Nike has approximately $3.2 billion in cash and cash equivalents as of last report, and the company will most likely continue to repurchase shares as it still has approximately $11 billion remaining under its repurchase program. redemption of shares.
Finally, Nike’s P/E multiple fell from 23.8x at the end of 2017 to 39.6x at the end of 2019. While Nike’s P/E has fallen to around 35x now, given the volatility of the current situation, the Nike’s P/E has grown 47% from December 2017 to April 2020. We believe the company’s current multiple is appropriate compared to levels seen in recent years: P/E of 39x at the end of 2019 and 61x as recently as the end of 2018. (The P/E multiple was exceptionally high in 2018 due to declining EPS, resulting from corporate tax rate changes).
How the coronavirus is affecting Nike stock?
The coronavirus crisis has hit the clothing industry hard. Companies have had to temporarily close their stores and it is still unclear when they will be able to reopen them, as the pandemic continues to spread, especially in Europe and the United States, which are the largest markets for clothing companies. The decline was exacerbated by the cancellation of major sporting events, including the Olympics, NBA and Euro 2020, which make up a decent chunk of the company’s revenue. However, Nike occupies a unique position in the apparel industry. Nike’s strong digital presence and geographic reach have helped the company carve out a niche for itself in the apparel market. Nike’s products are sold globally while it has a well-developed digital channel in over 45 countries. Additionally, Nike’s activity apps have increased user engagement and boosted the company’s digital sales. Despite the coronavirus outbreak, Nike’s digital business grew 30% in China in Q3 2020 (ending February). Nike’s retail business in China has also picked up steam as the company reopened all of its stores in China. Notably, China is Nike’s fastest growing and most profitable segment.
In conclusion, Nike’s revenue is expected to decline in fiscal 2020 (ending May), but Nike’s diverse business model and strong digital presence puts the company in a much better position relative to its peers. Additionally, Nike has sufficient cash reserves to deal with the repercussions of the outbreak, should the situation worsen. On the contrary, if there are early signs that the crisis is easing, the company’s shares could see a slight rise. Based on recent trends, we believe the company’s stock is currently reasonably priced and offers limited upside returns.
Our Dashboard forecast of COVID-19 cases in the United States with comparisons between countries analyzes expected recovery times and possible spread of the virus.
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