If you've been anywhere near the sports world in the last few weeks, you've likely been inundated with Nike 'Swooshes.' From Rafa Nadal winning the U.S. Open, to the disgusting sweaters released for the U.S. hockey team to wear in Sochi, to the great kits worn by America clinching a spot in the World Cup against Mexico on Tuesday night, and of course to the start of the NFL season; the 'Swoosh' has been inescapable which is as good a reason as any to analyze Nike (NYSE:NKE) as a stock.
The last time I wrote about Nike was in February of 2012, in this article, when the price was $52 per share (adjusted for a stock split in Q4 2012). I have since purchased the stock on a pullback ($43) and it has performed admirably, now at a price of $67. The purpose of this article will to look at some of the factors driving Nike's growth in a hope to determine if this stock can continue its climb or if it's been stalled out since May, in anticipation of Nike's next earnings report in two weeks.
So what are the factors behind Nike's growth? It should be no surprise that Nike's largest segment is footwear, accounting for greater than 60% of North American revenues. The reason why it's not surprising is because sneakers have great margins and if you go to any upper-middle class gym you'll see a large percentage in Nike training sneakers. On top of this are signature basketball shoes that cause unexplainable mini-riots upon their release.
My initial worry over the footwear segment is that the market would become flooded to the point that you will not see any more new buyers. This argument can be countered with the fact running shoes wear out very quickly if used properly and those who are fashionably conscious will require several pairs given Nike's current color palate.
Nike owns a number of other money making brands and offers an array of other products. In fact, I am wearing a Fuelband as I write this. Among the other brands are Jordan, Tiger's line, Converse, and Hurley. Each of these has a strong following willing to pay more for slightly higher quality and a logo. Additionally, as the opening of this article alluded to, Nike apparel is seemingly everywhere with buyers the world over given the coming Winter Olympics and FIFA World Cup.
In terms of purely numbers, Nike appears to be healthier than ever. Revenue is growing steadily, gross profits are growing steadily, earnings are growing steadily, and assets are up while liabilities are relatively stable. In two weeks' time Nike is expected to announce quarterly earnings of $0.78/share which would equate to 30% growth year-over-year. The stock is up by just over that percentage in that time. In sum, there are no glaring harbingers in Nike's financials that should keep you away from the stock.
It came as a surprise to me that Nike revenue in China had actually shrunk in 2013 with apparel facing the brunt of the loss at minus 7%. If you believe Nike's annual, this loss is because wholesalers were sooo bullish that they overstocked their inventories and could not move it as quickly as assumed. This is actually a plausible explanation and is a positive thing if viewed in the right light.
Off-setting losses in China and Japan were growth in the emerging markets, on the backs of soccer and running apparel. These emerging markets (Argentina, Brazil, and Mexico) made more than the two Asian countries, and I can only hope that their inventories are not overstocked as well.
Other Intangibles and Technicals
Below is a 1-year chart showing Nike's rise from just under $50 to over $67 at the time of this writing. You'll notice strong volume on the good days and low volume on the down days which is a bullish indicator. Additionally, you can see that the price has been straddling the 50 day moving average, which does not tell us much given that it does not have great support from it. Otherwise, there is not a great amount of information to be gained from this (you could argue that it just completed a pennant formation, but I would not consider that to be reliable).
Going largely unnoticed is the fact that Nike does pay a dividend. It normally comes on the first day of the quarter and right now yields about 1.2%. It's nothing to go crazy about but it is a nice bonus to owning the stock. Growth stocks do not typically pay dividends to investors, and Nike makes clear on its investor relations page that it is a growth company in a giant font.
For a growth company, Nike has a relatively low price to earnings ratio. Right now it is at around 24 and has been in that realm for over a year. For comparison's sake, Under Armor (NYSE:UA) trades at over 60. If the earnings come in as expected this figure would drop significantly and could be a cause for price growth.
With these factors in mind I think that Nike is fairly priced at the moment. Two weeks from now simply hitting their expectations could propel the stock upwards. What I would look for is the $65-$67 price range becoming new support levels and $69-$72 becoming a new upper resistance until more news comes out.
Disclosure: I am long NKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.