Will Nike Score Again?

  on March 21 2013 3:38 PM

With shares of Nike Inc. (NYSE:NKE) trading at around $35.85, is NKE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Nike dominates the athletic footwear and apparel space. This is a phenomenal brand with strategic athletic sponsorships through the years. Nike might not be thought of as a growth story, but there is still a lot of growth potential in emerging markets. Cost-containment has been excellent, and Nike is likely to see margin expansion in the coming years. Many people will point to Under Armour (NYSE:UA) as a significant threat. While these two companies are likely to continue to butt heads, it’s not about one company defeating the other. They’re both likely to succeed. Competition breeds success, and this is likely to be a prime example.

As far as the question in the title goes, it pertains to earnings. However, the answer is irrelevant. Trading on earnings is rarely a good idea. Instead of gambling, we’re looking at the big picture. And in the grand scheme of things, Nike is a long-term winner. That said, for those who are interested in earnings, Nike has a good track record, beating in three of the last four quarters. On the other hand, it usually comes down to guidance. There are also two potential warnings. One is that inventory has increased in China. The other is that UBS AG (NYSE:UBS) reduced its estimates due to foreign exchange impact. Analysts expect EPS to come in at $0.67 on $6.23 billion in revenue.

The chart below compares fundamentals for Nike, Under Armour, and Lululemon Athletica Inc. (NASDAQ:LULU). These companies differ in size. Nike has a market cap of $48.82 billion, Under Armour has a market cap of $5.12 billion, and Lululemon has a market cap of $9.30 billion.

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Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Nike is stronger than the industry average of 0.30.

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T = Technicals on the Stock Chart Are Mixed    

Nike has been a winner over a three-year time frame, but the past year has been a non-event. This is one of those situations where a 1.50 percent yield is nice to have.

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At $53.93, Nike is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

54.17

100-Day   SMA

51.43

200-Day   SMA

49.90

 

E = Earnings Are Impressive           

Earnings have consistently improved for several years. Top-line growth has been strong over the past two years.

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When we look at the last quarter on a year-over-year basis, we see an increase in revenue and a decline in earnings.

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Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Trends do not support the industry at the moment simply due to an inventory glut. However, this industry tends to bounce back over the long haul.

Conclusion

Nike has strong margins, consistent top-line and bottom-line growth, a healthy balance sheet, a superb brand, impressive historical stock performance, and a 1.50 percent yield. It’s not about what happens with earnings today; it’s about long-term potential. And when it comes to long-term potential, Nike is an OUTPERFORM.

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