Some people report that they feel so good after a long run that it is almost as if they are experiencing a blissful high on some real good mood-altering drug. Is that feeling real or is it just an illusion?
On Friday Nike (NKE) reported first-quarter revenue of $7 billion and earnings of 86 cents per share. Since analysts were expecting earnings of 78 cents per share, Nike's share price soared to an all-time high of $75.25 before ending the day at 73.64. (Earnings Call Transcript)
Nike's share price is up 43% for the year. Is it time to cash out?
Last week, I wrote an article, The Nightmare Before Christmas, on the debt ceiling crisis, the S&P 500, a possible October stock market crash and the global economic outlook in general. My conclusion, in concurrence with other respected Seeking Alpha analysts, was that it is not a bad idea to hold on to a fairly heavy cash position these days.
Nike ends its financial year in May, so it is rather cumbersome making comparative quarterly trends, so I took the time to chart its chronological three-month results since early 2012; the legends on the following graph are the initials of reporting months.
Now, let us take a closer look at the four main headlines in Nike's early Friday's financial release that got everyone so excited:
1. Revenues from continuing operations up 8% to $7 billion
2. Diluted earnings per share from continuing operations up 37% to $0.86
3. Worldwide futures orders up 8%
4. Inventories as of August 31, 2013 up 6%
Revenues came at $7 billion, an increased of 8% compared to same financial reporting period in 2012; quite impressive. However, sequentially, revenue only increased by 4% compared to previous quarter, less than Friday's one day spike in Nike's share price.
Year to date, Nike's average sequential quarterly revenue increase was 5%, compared to 1% for the same period last year, so we are talking of a differential increase of 4% over 2012; hardly a reason for 43% overall increase in share price in 2013.
Quarterly net income, at $780 million, increased 33% over the same period the previous year and 30% sequentially. Diluted earnings, at $0.86 per share, also increased 37%. That reflects a 1.2% improvement in gross margins combined with a 1% decline in the weighted average diluted common shares outstanding.
Again impressive, and annualized would give a P/E of 21, rather high for a shoe maker but compared to that of the S&P 500 as a whole, which currently stands at 19, I would consider it a very good metric.
As of the end of the quarter, worldwide futures orders for NIKE Brand athletic footwear and apparel scheduled for delivery from September 2013 through January 2014 were 8% higher than orders reported for the same period last year.
Looking closely, we can see that the widely-watched sales in China increased by only 3%, on a quarterly basis, and future orders increase was also in the same bracket. Reported future orders for Japan actually declined 19%.
Still, it is good to know that we are looking at a secure 8% growth in revenue in the last quarter of the year, given that these orders have been secured at last year's average price level.
In a just-in-time world it is hardly rational to celebrate an increase in inventory. This increase might be due to the decline in sales in either China or Japan.
I love the winged Goddess of Victory and I believe its stock is a good long-term store of value. However, given the current macro-economic outlook for October, I feel that the 4.7% spike in share price on Friday might be an overreaction to elegantly spun good news. If I was holding Nike right now I would sell in the frenzy and buy my shares back after the fall.