Nike (NKE), the athletic footwear juggernaut, reports their fiscal 3rd quarter after the bell on Thursday, March 21st, 2013, with analyst consensus expecting $6.2 billion in revenue, and $0.67 in earnings per share (EPS), for year-over-year growth of 7% in revenues and 12% in earnings per share.
Futures orders are expected in the 6% - 7% range
NKE's stock is up a little over 6% year-to-date (YTD) as this is being written, underperforming the SP 500, and was up roughly 7% - 8% in 2012. The stock had a great year in 2011, a year when the SP 500 was up just 2%, returning over 13%.
What has kept us out of the stock has been valuation, since every time we've done an earnings preview of NKE, we've found a 20(X) - 25 cash-flow valuation on the stock, which isn't untypical of an iconic brand, but is still too salty a valuation at which to originate a position.
Nike has seen margin pressure from the end of fiscal 2010 (or roughly May, 2010) when the gross and operating margins peaked at 47% and 14% respectively, but have fallen to 42.5% and 11.7% respectively since then.
Nike's futures orders growth, which is merchandise scheduled for delivery for the next quarter has also trended lower, per the following data:
|Quarter||Futures orders (constant currency)|
Per a research note dated March 8th out of Credit Suisse, the analyst expects the following revenue growth from Nike's China segment: (using historical and expected revenues):
|q4 '14 (est)|
|q3 '14 (est)||+5.4%|
|q2 '14 (est)||+3.8%|
|q1 '14 (est)||-0.04%|
|q4 '13 (est)||-6.5%|
|q3 '13 (est)||-8.7%|
At its current valuation, NKE is trading at 21, 18 and 16 forward earnings for expected EPS growth of 12%, 14% and 13%.
The cash-flow valuation is 18 4-quarter trailing cash flow, and 24 free-cash-flow, both of which exclude the balance sheet cash from the market cap.
The one unambiguous positive around Nike is that the company is a prodigious free-cash-flow generator. With a free-cash-flow yield of 8% (calculated as free-cash-flow as a percentage of market cap), management has been returning a lot of cash to shareholders in the form of dividends and the share repurchase plan.
Since we track "4-quarter trailing" free-cash-flow, against capital returned to shareholders, Nike is exceeding their free-cash-flow with the dividend and the share repurchase, although just modestly so. (Not a big deal in our opinion).
Because we manage client money for a living, although we love the brand, and the management, we prefer to wait for a more attractive valuation to buy a bigger position in the stock. A trade below $50 would start to get us interested, and a trade near $40 we think would be a table-pounding buy, but iconic and world-class brands often never trade cheaply.
Here are our two most recent Nike earnings previews one from Sept. 2012 and then December, 2012. The valuation has improved on Nike, but is still not yet, "cheap enough" for our tastes. Our internal model values NKE at $57, and Morningstar has a fair value on the stock at $50, so where it is trading today, Nike is probably considered fairly valued.
We remain long one long-term position in NKE bought in May, 2004 at $17 per share.