Nike: Commodity Costs Rising but Expansion Opportunities Could Lift Stock

| About: Nike Inc. (NKE)

Nike (NYSE: NKE) is the world’s largest manufacturer of athletic footwear, apparel and equipment by sales. The company competes with the likes of Adidas (OTCQX:ADDYY), Puma (OTCPK:PMMAF) and Reebok.

Nike’s stock recently suffered a significant drop due to rising costs of production that can potentially hurt its margins. While China seems to be contributing to rising costs, it also presents an expansion opportunity that can produce upside to our base case market share forecasts and, correspondingly, our price estimate.

We currently estimate Nike’s stock value at $68.63, which is about 20% below the current market price.

Rising Costs

The costs for commodities like cotton, along with labor and transportation costs have been rising. Given that Nike has several manufacturing facilities in Asia, this trend could impact its margins.

Cotton prices have increased significantly over the past few months as a result of heavy buying from China, the world’s largest importer. Additionally the devastation of Pakistan’s cotton crop due to floods has led to shortage concerns and upward pressure on prices.

Labor costs in China have also increased, a trend that could raise production costs and reduce gross margins for Nike. We note that Nike’s manufacturing facilities are actually spread across several Asian countries, so the risk posed by higher labor costs in China is limited.

Still, the combination of rising costs for commodity, labor, and transportation could weigh on company margins going forward.

Drag the trend-line in the chart below to see how reduced profit margins for Nike’s footwear division can impact the company’s stock value. We note that the footwear division is the single largest contributor to Nike’s profitability, by our estimates, generating 44% of the company’s stock value.

Created using the Trefis App on Seeking Alpha

But Expansion Opportunities Exist

While China is contributing to increased production costs for Nike, it also presents expansion opportunities. Nike’s management has indicated that the company sees a significant market potential in China, and that there is solid demand for branded sports products. [1] With a de-pegged currency and increasing buying power, China presents a lucrative growth opportunity that can help Nike gain share in the sports products market.

To demonstrate Nike’s stock price sensitivity to a change in sports footwear market share alone, we estimate that there could be 6% upside to our price estimate if Nike is able to increase its global share of the sports footwear market to 22% by the end of our forecast period, vs. our base case forecast of roughly 19%.

Drag the trend-line in the chart below to see the impact of various sports footwear market share scenarios on Nike’s stock value.

You can see the complete $68.63 Trefis price estimate for Nike’s stock here.


Disclosure: No positions