Nike Is A Great Company, But The Stock Is Expensive

| About: Nike Inc. (NKE)

Summary

Nike's quarterly revenue grew 14%, ignoring foreign currency headwinds, while gross margins held steady at 45.9%, and future orders increased 17%.

The company continues to be a market leader in designing cutting-edge products and creating a consumer experience through strategic partnerships and the development of an engaging social platform.

With a current price-to-earnings ratio of above 30, the company's stock appears to be expensive, and investors should wait for additional weakness before purchasing.

Nike (NYSE:NKE) reported strong earnings on March 22, 2016, as Q3 2016 revenues grew an impressive 7.6% to $8.03 billion. More importantly, revenue excluding currency headwinds increased 14%, gross margins held steady at 45.9%, and future orders increased 17% excluding currency headwinds. Despite these strong numbers, shares fell in response due to a lower-than-expected revenue growth, annual futures growth, and cautious sales and EPS guidance. However, as a long-term investor, it is important to look at the big picture and analyze the keys to Nike's future success.

Nike continues to be a leader in technology when it comes to sports apparel. This can be seen in the company's iconic shoe product line and the introduction of LunarEpic, Free RN Motion, and Mercurial Superfly. Each product is innovative in its own regard and the backbone of Nike's future growth. Additionally, the company unveiled its auto adaptive lacing with the Nike HyperAdapt 1.0, which is expected to transform the way we wear shoes. The HyperAdapt 1.0 utilizes technology to create an adaptive lacing for athletes, which constantly monitors and adjusts the way shoes fit. Nike continues to lead on the technology frontier when it comes to its product lines, which is critical to the company's long-term sustainable success.

In the basketball shoe realm, Nike continues to take advantage of superstar relationships with Michael Jordan, Kobe Bryant, and Kevin Durant while also creating excitement around younger players including Zach LaVine and Aaron Gordon. Because of these important strategic relationships, the company enjoys a market share of over 90% in basketball sneakers. This continued success comes in the face of Nike losing several key superstars, Stephen Curry and James Harden, to key competitors. While these major signings by adidas (OTCQX:ADDYY) and Under Armour (NYSE:UA) haven't hurt the company's market share, NKE must continue to invest in strategic partnerships with superstars in order maintain this impressive market share.

In addition to creating lifelong customers with strategic partnerships, the company must continue to engage and connect consumers through the NIKE+ application. This application creates an engaged customer base by bringing together demand coaching, shopping, and a fitness community. Creating this engaged customer base is important in today's connected world and will build deep and rich relationships with the athlete. In order to be successful, it is important for Nike to create a better and more engaged platform than Under Armour's Connected Fitness initiative.

Each of these initiatives is extra important in the current year given the company's first official Olympic organizing committee sponsorship since the 2000 Sydney Games. In addition to receiving the marketing and licensing rights to the Rio Games, the company will also outfit all Brazilian national teams (except volleyball) and the USA track and field team. This sponsorship will put the company's products and platforms in the spotlight and should provide a revenue boost in a normally slow summer period. Additionally, it should provide exposure to emerging markets, which posted impressive Q3 2016 growth.

Region

Revenue Growth (currency-neutral)

Central and Eastern Europe

29%

Greater China

27%

North America

13%

West Europe

12%

Emerging Markets

11%

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Nike's formula for success remains the same - producing superior products through innovation and listening to the market and establishing an experience through interaction and marketing figureheads. By accomplishing these goals, Nike will be able to maintain and grow its market share in key markets in North America while replicating the success in international markets. Based on my analysis of management concentrating on these initiatives and the company's success in its most recent reporting, I believe Nike is a strong company fit for long-term sustainable growth.

With the company currently valued at a price-to-earnings (PE) ratio of 33.32 and 2018 estimates expecting the PE ratio to fall down to 21.86, it does appear to be expensive at current levels. However, it does appear cheap compared to Under Armour, which has a PE ratio of 78.25, but it trades above Lululemon (NASDAQ:LULU), 32.22, and Skechers (NYSE:SKX), 20.38.

In conclusion, I believe that Nike is fundamentally a strong company. NKE is designing and introducing superior products to competitors and is concentrating on engaging its customers through a platform and by signing the best athletes. This commitment has fueled consistent growth in North America while ramping up growth levels in international markets. However, I believe the stock is slightly expensive at the moment and would hold off buying until a lower place. Given the negative reaction to the company's earnings release, I believe the stock will see more downward pressure, which will give long-term investors a better opportunity to build on or create positions in the stock. I would recommend buying in the mid-50s price range.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.