NKE Forecast: Expectations Drive Stock Price to Eliminate Any Value

 

 

This article was written by Grant Goldstein, a Financial Analyst at I Know First

 

 

 

“Business is war without bullets”

– Phil Knight

(Source: Flickr)

NKE Stock Forecast

Highlights:

  • Nike Runs All Over Q4 Expectations
  • Current Stock Price is too High
  • Bearish NKE Recommendation

Nike Stomps on Q4 Expectations

Nike had an exceptional 2018 Q4. Revenue increased by 13%, pushed by international business growing 23% and a return to a “healthy” North American growth. Another driving force this quarter was NIKE Digital, the company’s online presence push, which was up 34% this quarter and helped grow EBIT by 8.64%. The Nike App SNKR and NIKE Plus allows the company to better understand their customers, giving curated sneaker recommendations, increasing sales. The company saw tremendous success in this digital sector, as gross margin increased by 60 basis points.

NKE Income Statement (Source: YCharts)

Michael Jordan’s globally recognized Nike brand was up double digits, even increasing sales in China by 50%. This comes as the company released the iconic shoe to a broader woman audience; this quarter, the Jordan woman sector increased by triple its previous size.

Jordan Sneakers (Source: Pixabay)

Nike fully expects the World Cup to help drive sales. Over 60% of players in the competition are wearing Nikes. The company has also took initiative in including fully designed collections for soccer teams, including England, France, Portugal, Brazil, and Nigeria.

Diluted EPS increased by 15.46% to $0.69, beating Zacks expectations by 7.81%. Although full year diluted EPS declined by 53%, the company believes this is a one time impact of the new U.S. Tax Reform.

NKE Earnings (Source: Yahoo Finance)

The company is showing tremendous confidence in itself as it announced it will be implementing a four year $15 billion share repurchase program. This is to coincide with their current $12 billion share repurchase program, which they state will be completed within fiscal 2019. This quarter alone, the company purchased $918 million worth of capital stock. Nike also satisfied stockholders by increasing dividend per share by 11%.

NKE is Overpriced Compared to the Footwear and Accessories Industry

The company’s EV to EBITDA is 23.27 compared to the industry’s 20.82. This is considerably high and a sign that the stock is currently too expensive; a high EV/EBITDA suggests that Nike is being valued too high compared to each dollar of EBITDA.

The trailing 12 month PE ratio is also larger than the industry average by 17.47. The price of the stock is inflated compared to the true earnings of Nike. This high PE ratio shows Nike is in high demand and investors are expected a substantial next quarter.

The trailing 12 month PS ratio of Nike is 3.468. This is greater than the footwear and accessories average of 2.336. A low price to sales ratio is generally more appealing to investors as it implies the company is undervalued, which is not the current case for Nike.

NKE Valuation (Source: YCharts)

Using the Benjamin Graham’s Number to calculate the fair value of Nike, it is forecasted that the stock is worth $12.58. So, by Grahams standards, a defensive investors should be willing to pay a maximum of $12.58 for Nike. Current stock price is $76.48.

YCharts currently has a below average value score for Nike. This score indicates that earnings and assets are considerably lower compared to price.

NKE Value (Source: YCharts)

Also, YCharts valuation model puts Nike at 14.53% overvalued.

Valuation (Source: YCharts)

On July 29th, after Q4 earnings were released, the MACD experienced a bullish buy for NKE when a signal line crossover happened. The MACD is also above zero, a bullish sign which occurred on April 3rd.

NKE MACD (Source: NASDAQ)

Nike News

The Los Angeles Lakers, worth $3.3 billion, are the second most valuable NBA franchise. Lebron James is life time partnered with Nike, so his new switch to the Lakers could be very valuable to the Nike brand. Nike is the sole creator of NBA jerseys and it’s very evident that fans will be rushing to get his jersey. Pre-orders for the new jerseys are already in place as fans are lined up to buy.

Lebron Jersey Concept (Source: CBS)

If you thought the World Cup was just about countries battling each other in soccer, you were wrong. One of the competitions this year is Adidas vs Nike. World Cup teams wearing Nike and Adidas jerseys are playing each other, an interesting competition for the clothing industry. Nike currently produces the jerseys for France, and England, which are all favored to win by betting websites. Last World Cup, over half the world’s population watched, so Nike’s exposure will be as high as ever.

Nike Vs. Adidas (Source: Flickr)

Arguably the biggest male tennis star, Roger Federer, is not renewing his partnership with Nike. Early in 2018, Federer signed on with Uniqlo, a company whose presence in the U.S. is growing fast. This is a big deal because now athletic companies are not the only brands that can snatch up athlete deals, considering Uniqlo isn’t primarily an athletic company. NKE dropped 3% following this news.

Federer in Uniqlo  (Source: FT)

In his memoir, Shoe Dog, Nike founder Phil Knight stated that China “is our second largest market”. Last quarter they even sold $1.2 billion sneakers and apparel to the country, or 15% of all revenue. This would have been seen as a positive news while the book was written, but the recent trade war between the U.S. and China reflect deep concerns for the company. Nike produces more shoes in China than anywhere else, so export and import tariffs are going to deeply affect the company’s sales and production.

SWOT Analysis

Strengths:

  • Expectation Beating Q4 earnings
  • Strong financials
  • A growing presence in Asia
  • Growing Jordan brand
  • Household name
  • Lifetime Lebron James deal

Weaknesses:

  • Stock price is overvalued
  • A yearly shrinkage of the North American market
  • Loss of Roger Federer

Opportunities:

  • The World Cup
  • Lebron James signing to Lakers
  • Digital business

Threats:

  • Lululemon has been rising by up to 50%
  • Under Armour has doubled its 52 week low
  • Nike manufacturers in China, so tariffs could greatly affect sales and revenue
  • The rise of non-athletic companies signing athletes

Read the article above for more information

Analyst Recommendation

NASDAQ analyst recommendations include individuals from Bank of America, JP Morgan, and Oppenheimer. 13 out of the 24 analyst recommend you hold Nike, while 9 recommend buying.

Analyst Recommendation (Source: NASDAQ)

Current I Know First Bullish NKE Forecast

I Know First has a bullish forecast for NKE. With a signal of 23.59 and a predictability of 0.73, the Algorithm is forecasting that NKE will go up.

Here is the explanation for how to read the I Know First Forecast and Heatmap.

Conclusion

I would give NKE a very strong hold recommendation, coinciding with analysts. I feel strongly for holding NKE because the company really does have great opportunities. For instance, Q4 earnings were fantastic and the company finally saw an increase in North American sales. Lebron James going to the Lakers will bring in substantial revenue for Nike, since the franchise is the second biggest in the NBA and fans are already rushing to get the jersey. Finally, the World Cup will provide generous sales for Nike since over half the world population watches and fans will dying to get the winning teams jersey, shall it be a Nike wearing team.

With that in mind, there are too many negatives to suggest a bullish buy. For instance, the current price for NKE is too high to buy based on their current financial situation and compared to industry ratios. Stock price has already factored in the high expectations for the upcoming Q1, rendering NKE an awful current purchase. With trade wars escalating every week, Nike has a lot to lose, since they manufacture heavily in China and the country is a huge market for them; Nike is caught in the crossfire and it won’t end well for them if the tariffs are enacted. Finally, the increase of competition may severely hurt the brand. If Uniqlo, a seemingly unknown company two years ago, can sign a deal with Roger Federer, one of sports largest icons, it means that any clothing company can take Nike’s athletic business.

So, yes, there are a lot of great opportunities to come for Nike, which is why I recommend the hold. But, I would not recommend buying mostly due to the current stock price being too high to attach any value to it. 

I Know First Algorithm forecast is not in agreement with my personal forecast.

Past I Know First NKE Success

On July 9, 2017, I Know First Algorithm gave a very bullish forecast for NKE. The Algorithm gave NKE a signal of 153.07 and a predictability of 0.7. The stock gained 31.91% since this forecast.

This bullish forecast for NKE was sent to the current I Know First subscribers on July 9 2017.

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