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Nike isn't a sell, let alone a "Strong Sell"



August 21, 2012 – Comments (3) | RELATED TICKERS: NKE

I hadn't been following NKE until I came across Eddy Elfenbein's latest article titled "Nike is a Strong Sell."

After about 30 seconds of reading, I immediately decided I disagreed with him, and after a few more minutes of research, I'm starting to think it's actually a decent buy at these prices.

Per the last earnings report, quarterly revenue was up 12% (Elfenbein states in his blog that revenue "plunged" 12% - not sure how he missed that one).  Net income dipped from $590MM to $550MM, but $24MM of that was a write down.  The non GAAP EPS miss wasn't as bad as the $0.20 miss that Wall Street blew out of proportion.

The slight slip in margins doesn't worry me too much - its not uncommon for a company to sacrifice short term profits to grab market share in new markets, which Nike is frantically trying to do in SE Asia.  Coke is notorious for doing this.

3 year revenue growth is clocks in at 8%; 5 year growth at 6%.  Assuming revenues correlate with earnings over the long term, I think growth at these levels easily warrants a PE of 20+.  If you back out the $3B in cash on NKE's balance sheet, the current PE is well under 20.  If the company grows at 5% for the next 10 years, the company is arguably fairly valued.  If growth exceeds 5%, it's undervalued at these prices.

The technicals look a little weak - the stock recently fell through the 50 day, 200 day, and 50 week SMAs.  If the stock continues to fall, I might add a position.

I typically love reading Crossing Wall St, but I think he's a bit off base saying he's not a buyer until it hits $70 - I don't think it will ever get there... 

3 Comments – Post Your Own

#1) On March 20, 2013 at 9:16 AM, ElCid16 (92.85) wrote:

A bit of shameless self-promotion, here.  Nike is up about 12.5% since I posted this article.  The stock hasn't come close to $35 - the point where EE said the stock would be a buy.  Barring a market correction of >25% in the next year or so, I doubt this stock will ever hit $35.

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#2) On January 25, 2014 at 1:02 PM, ElCid16 (92.85) wrote:

More shameless self-promotion: Nike is now up about 50% since I posted this article.  The SPY is up about 27% over that same timeframe.

The PE is still a cash-adjusted, very reasonable, 22 or so.  Still not a "strong sell." 

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#3) On December 01, 2014 at 8:10 PM, ElCid16 (92.85) wrote:

Ok, here we are another 10 months since my last comment.  YTD shares are up another 24%, compared to the 11% for the SPY.

Since EE's blog post, Nike is up roughly 110%.  The SPY is up about 50%. 

I think I should have gotten at least a one rec for this blog...

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