An Earnings Whisper number is the number in most analysts' models -- either on the buy side or the sell side -- that a company needs to beat for numbers to get revised higher. Nike's (NYSE:NKE) results last quarter are a good example of this. The company beat the consensus earnings estimate of $1.16 per share with earnings of $1.20 per share, but this was a penny shy of the $1.21/share Earnings Whisper number. The miss made it a short candidate for subscribers, and the stock sold off 3.41% on the news accordingly.
More importantly, though, the miss marked the peak in earnings estimates, and even though consensus estimates were beat, analysts started revising their estimates lower following the news. Now we are in a position where earnings are trending lower and, as is typical, the stock is following.
Trending stocks tend to have estimates trending in the same direction, while the denominator in the P/E ratio changes but the multiple also tends to move in the direction of the estimates. Stocks with upward rising estimates can justify a premium to their historical P/E multiples, but stocks with downward trending estimates generally trade at a discount. That is an added concern for Nike investors since the stock has historically traded at 15.8 times estimates, which means the stock would be fairly priced at $91 using current estimates. If estimates are going to continue to trend lower, then Nike still has significant downside room in the stock.
There is some good news, and that's the fact that there are still a few positive trends in the U.S. apparel and the global running and basketball footwear market -- not to mention the 2012 Summer Olympics are now upon us. Nike has also had favorable pricing during the quarter, and global futures should be solid. The problem, especially going forward, is the same problem that so many international companies are facing -- the reversal of the currency tailwind. What once was a benefit to the company is now expected to weigh on sales by as much as 3%. When you combine that with a recent trend in higher input costs, we see little reason to expect longer-term estimates to move higher. Throw in the fact that inventories are likely to remain high and it puts the overall risk to the downside.
Most of the downside risk is likely to come from the longer-term estimates, and the company is still expected to modestly beat earnings estimates for the fourth quarter. The consensus earnings estimate is $1.37 per share and the Earnings Whisper number is $1.42 per share.
The stock is reaching an oversold level, which makes it difficult to short, but a gap higher on the news with a number south of $1.42 should present a selling opportunity. The chart we've drawn above shows a trading channel that puts the first resistance point just below $103, with the next around $106.50.
Nike is scheduled to report earnings after the market closes today, June 28, and will host a conference call at 5:00 p.m. ET.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in NKE over the next 72 hours.