It’s Time To Buy Nike

It’s finally time to buy Nike. The stock was pummeled as investors sold off shares after Nike missed its quarterly earnings estimates. The company reported  earnings of $523 million. Nike earned $1.08 a share,which was below the $1.12 estimate. Total revenue came in at $5.1 billion which was below the expectation of $5.18 billion. The stock was down 9% yesterday and ended the day at $76.

Nike Stock

I did a stock analysis on Nike back in February when the stock was at $85.  The stock has fallen almost $10 over the last 30 days.  This is a good level to initiate a position in Nike. The company is still seeing strong demand as orders are up 11%.  Growth in North America is up 9%. Nike continues to buy back shares as the retailer bought back nearly half a billion dollars of shares last quarter.

Sales are still high but margins were compressed due to higher input costs. Gross margins dropped a full percentage point to 45.8%.  The company blamed the following areas for the higher costs:

  • Oil Prices
  • Cotton (Higher agricultural products)
  • Labor (Payroll expenses)
  • Transportation (Freight costs)

The company was affected by currency fluctuations and higher taxes. Nike saw its tax rate increase 1.2% to 26%. Inflation and unemployment played a role in domestic demand as well.

Many of these concerns are short term hiccups. Nike still has strong demand for its products and generates billions in free cash flow.

Nike Stock Valuation

Nike currently trades at 18 times earnings and 15 times next year’s earnings. The stock trades at 3.7 times book value, 1.9 times sales, and 15 times cash flow. That’s a reasonable valuation for such a premium franchise.

I wouldn’t back up the truck and load up on Nike but I would be willing to buy shares here. This is the first time in a long time that Nike has hit a level that I would look to purchase more shares at.

 

Comments

  1. Sounds awesome! We all know that Nike is a solid stock, and now that they’re down 9%, I agree, it’s time to buy! :)

  2. I agreed! You just took the words out of mouth, Nike is a great buy right now. Can you imagine a world without Nike? That’s right, i didn’t think so. Nike is part of every corner of the globe. I think I saw some homeless guys on the street corner the other day, and what where they wearing? NIKE!

  3. avatar Jeff says:

    Nike definitely seems like a good buy, but for $10 cheaper you could buy Under Armour. I’d rather own Under Armour any day, as it seemingly is the new and younger version of Nike.

  4. You mentioned Nike has great North American growth; how is it going in other parts of the world? That’s where you’ll find an emerging middle-class with a young, sports-enthusiastic population.

  5. avatar Neil says:

    I would agree, if this is a bounce, that 74 to 75 is a good level to buy. I would caution if it goes below those numbers!

  6. avatar JT McGee says:

    I’ll be interested to see if they’re able to pass on higher costs to consumers. The headlines recently read that they’d be pushing prices up on a number of their goods, so let’s hope consumers are willing to bear the uptick in commodity prices. I think a brand like Nike has the staying power to pass on the costs, but the weakness of the consumer still worries me.

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