Slowing Profit Growth and a High P/E Make it Hard on Nike

Stock (Symbol)

Nike (NKE)

Stock Price


Retail & Travel
Data is as of
July 25, 2016
Expected to Report
Sept 22 – 26
Company Description
nike_forreuseNIKE, Inc. is engaged in the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. The Company sells its products to retail accounts, through NIKE-owned retail stores and Internet Websites (which the Company refers to as its Direct to Consumer or DTC operations), and through a mix of independent distributors and licensees throughout the world. The Company focuses its NIKE Brand product offerings in eight key categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear and Golf. The Company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. The Company’s portfolio brands include the NIKE Brand, Hurley and Converse. Source: Thomson Financial
Sharek’s Take
David SharekNike (NKE) is a fabulous stock, but it needed a rest. During the past 30 years NKE’s stock has gone from fifty cents to more than 50 dollars, but over the past year the stock was too high. Nike grew profits a sparking 24% in fiscal 2015 and 22% during the first half of fiscal 2016. But last qtr the company had 0% profit growth. It also lowered next qtr’s estimate to -16%. Looking forward to the following qtrs things look good with 16%, 22% and 33% profit growth expected, but there’s a chance these could get lowered too. Overall, I’m nitpicking NKE, and the reason is the stock has an Estimated Long Term Growth Rate of 13% yet carries a P/E of 24 — which is a bit high. Shoe companies are dependant on the economy, as people don’t replace their shoes much when times are tight. Thus, a P/E double the company’s growth rate might be too high. Now that’s not to say this isn’t a top-tier stock. NKE is a World Champion in so many ways. There’s been times when this stock has sold for around 20x earnings, and I feel the current Fair Value on this $57 stock is $53 a share, or 22x earnings. I’m waiting patiently for the stock to pull back further, as I would like to buy it in the Conservative Growth Portfolio
One Year Chart
NKE_2016_Q2Profit growth was flat last qtr on a 6% increase in sales. The adjustment in qtrly profit growth can clearly see in this one-year chart. Still, profit growth is expected to jump back over 20% a few qtrs from now. Will Nike hit the mark? We’ll see. It’s not good that the company just lowered next qtr’s estimate from 6% to -16%, which I bet has many money managers (me) wondering if it will lower again. Annual Profit Estimates have declined slightly during the last 4 qtrs, which isn’t bad but isn’t good either. 2016’s number has declined from $2.44 to $2.40 the past year.
Fair Value
NKE_2016_Q2_PH2010, 2011, 2012. Those were the years you could have had NKE for 20x earnings. But honestly, profit growth wasn’t that great then (28% vs easy comparisons in 2010, then 13% growth and 7% growth the following years). This table shows me is how relentless this company is in driving profits higher. Nike is like a machine. Management also pays a dividend, the yield is slightly more than 1%.
Bottom Line
NKE_2016_Q2_10yrNike is a high-quality company. But during the last ten years the stock’s rose 19% a year vs the profit growth rate of 13% per year. These numbers should be closer, thus I still think this stock needs to come down a bit or take a breather until it gets a lower valuation. But we can’t sit on our hands long as a return to 20%-plus profit growth is expected a few qtrs from now. This is a stock I want to collect for conservative investors below $50 a share. 
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