Nike at its All-Time Low: A Good Choice for Investors?

Two weeks into the war between Russia and Ukraine and the stock market has tumbled like a pack of cards. Wars not only damage conflicting nations but also cause worldwide economic disruption. As a result, there has been a sharp jump in commodity prices due to supply constraints, which poses a higher inflation risk.

Over the past month, the S&P 500 Index was down 7.1% and the NASDAQ composite was down 9.6%. Global stocks are trickling down in value each day. Athleisure stock Nike Inc. (NKE) is also down 9.3% since the onset of the war.

Nike designs, markets, and distributes authentic athletic footwear, apparel, equipment, and accessories across the globe. The company also sells athleisure products under the Jordan and Converse brands.

Like several other companies, Nike too, has announced a temporary closure of both its physical stores and website/app sales in Russia. However, these closures will not have any material impact on Nike’s business.

Nike surprised investors with upbeat Q2 results for the quarter ending November 30, 2021. Favored by consistent demand for its offerings coupled with margin improvement from higher Nike Direct and Nike Brand Digital sales, the company’s results exceeded both its top and bottom lines. Its third-quarter results for fiscal 2022 are scheduled for March 21, after the market closes.  

On March 7, Nike stock hit an all-time low of $124.17, falling more than 5%. So, what’s happening with Nike?

Two leading analysts on the Street have given strikingly different views on NKE stock post its second-quarter fiscal 2022 results.

Jefferies analyst Randal Konik remains positively bullish on NKE with a price target of $200, which implies a solid 60.7% upside potential to current levels.

Meanwhile, analyst Sam Poser of Williams Trading has downgraded the stock to a Hold rating from his prior Buy rating. Poser has also lowered the price target on the stock to $125 (almost fully valued at current levels) from $196.

According to Poser, Nike’s guidance for FY22 is at risk of being missed due to persistent supply chain issues, which he feels have “stagnated” after it eased towards the end of 2021. The analyst mentions that a lot of wholesale orders from Nike’s key vendors are “either being pushed out more than 3 weeks or being canceled.”

Nike Financials

A look at Nike’s historical numbers shows that Nike has surpassed its pre-pandemic levels in both revenue and earnings per share (EPS) terms in 2021 itself. Nike’s compounded annual growth rate (CAGR) for the last five years was 6.6%. Moreover, Nike’s net income has grown at a CAGR of 8.75% in the same period.

Six months into fiscal 2022, Nike has already reached $23.61 billion in revenues. With supply chain issues and pandemic-related restrictions already easing out, the company is quite likely to meet the expectations for the upcoming quarters. Even for the six months ending November 30, 2021, all geographies except Greater China reported an upward trend in revenue.

In FY20, it was no surprise that Nike’s revenue growth across various geographies tanked in tandem with the overall fall in total revenue. However, in FY21 all geographies regained momentum and posted double-digit revenue growth.

In Q3FY22, Nike expects revenue to grow low single digits compared to Q3FY21, and for fiscal 2022, it expects revenue to grow mid-single digits over the prior year. Nike has also decided to direct all its efforts towards its direct-to-consumer sales channel, and reduce its exposure in vendor-partner sales to mitigate the compressing margins and brand dilution issues.

The consensus estimates for Nike’s FY22 revenue are pegged at $47.14 billion (5.8% Y/Y growth) and EPS stands at $3.69 per share.

Similarly, consensus estimates for FY23 revenue stand at $53.64 billion (13.8% Y/Y growth) and EPS estimates stand at $4.82 per share.

China remains one of the key markets for Nike. However, with all the anti-western protests in Greater China following the Xianjing movement last year, Nike has lost a majority of its fanbase in the country. The company will have to make greater efforts to regain its lost share and stellar growth that it witnessed during the past decade.

The consensus considers an almost flat revenue growth for FY22 and a 20.8% revenue growth for FY23. Having said that, analyst Poser’s stance on China remains unchanged with the “increased nationalism” expected to hurt Nike’s revenues in FY22. His stance opposes Nike’s November guidance, which “called for trend in China and Asia to improve.”

Relative Valuation

According to analyst Poser, Nike has been trading historically at a five-year average of forward two years (FY2) Price-to-Earnings (P/E) of 28.1x (Range: 18.8x-39x). However, following Q2 results, the analyst has lowered forward estimates and price target, which now reflect an FY2 P/E multiple of 27.2x his FY23 EPS estimate.

Overall, the analyst has a cautious outlook on the sector due to, “Supply chain constraints, increased freight & materials costs, and near term headwinds as stimulus payments are lapped in early ’21.” Having said that, he views Nike to be one of the best bets in the sector.

Wall Street analysts have awarded the NKE stock a Strong Buy consensus rating with 17 Buys and 4 Holds. The average Nike price target of $184.40 implies 48.2% upside potential to current levels, at the time of writing.

Conclusion

Having considered all the viewpoints, both persistent supply chain issues and increased inflationary pressure from the ongoing Russia – Ukraine war pose a probable short-term threat to Nike’s financial performance.

Nevertheless, the current stock price seems to have captured most of the adverse impacts from these headwinds. Hovering around its yearly lows, NKE stock offers an attractive entry point for investors who look to hold the stock over a two-three year time horizon.

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