Nike's Upside Limited, With Profit Margins Slipping

Sep. 7.12 | About: Nike Inc. (NKE)

Nike Inc. (NYSE:NKE) continues to be a Hold for us right now, as the company does not have enough upside potential for us to want to buy it right now. The company's latest earnings were most of the reason for us to slash our price target, as costs rose and margins shrunk. A lot of that drop was on higher costs of doing business and restructuring efforts in Europe. Additionally, the company's tax rate rose from 23% to 26%.

Ticker: Nike (NKE)

Rating: Maintain at Hold

Price Target:

Click to enlargeClick to enlarge

At the same time, it was one quarter, and drops/discounts are buying places for one of the strongest brand names in the world. We still believe the company can grow 5-7% in FY 2013, as well as FY 2014, as it is positioning itself well in the soccer arena in Europe, emerging markets, and is planning to get rid of the struggling Cole Haan and Umbro lines. These lines are struggling and weighing on margins right now, and we believe selling both those lines will improve margins.


The company's outlook looks a bit uncertain right now. It is making some of the correct moves to help improve its position for the future, but there is still a lot of uncertainty surrounding the company that is keeping our expectations under wraps.

The company's CEO commented: "We will see continued uncertainty in the global economy and commodities and labor costs will continue to fluctuate. Currency pressures increased, especially in Europe and the emerging markets, and China's economy is expected to grow more slowly than we've seen over the past five years."


Margins have declined for Nike to fairly low levels, but one of the company's best assets is that it has a wide economic moat with strong profitability. Right now, the company's profitability needs to improve for us to increase our expectations for the company. We believe with the sale of Cole Haan and Umbro, as well as what should be an improving landscape in Europe in 2013-2014, these margins can swing back up. Until then, NKE will most likely stay in check.


Nike's value is pretty solid right now. The company has a PE ratio slightly below the industry average. We like to see sub-20 on current and sub-15 on future for good value. Down at the 90 area, Nike would be at a very nice discount. At its current price, it's looking more fair valued. Growth is not strong enough as well to suggest any premium on PE.


Nike ranked seventh out of 12 companies for growth in the Footwear industry. It's a middle-of-the-pack growth stock. It's well established in primary markets and growing at lower rates, while expanding into emerging markets well. The problem for growth indicators is just sheer size for NKE. That said, 5%-7% growth is still very strong for the company, and if it can get back on track with increasing margins and improving profits, the stock will see more valuation increases. For now, though, they are less interesting than better growth footwear companies like Steve Madden (NASDAQ:SHOO), DSW (NYSE:DSW), and Foot Locker (NYSE:FL) - which are our top three ranking growth companies.

Financial Health

Nike's financial health is pretty strong, with a very solid current and quick ratio, pretty low debt levels, and good FCF. The company has a very solid debt-to-equity ratio as well. Nike's financial health is very solid, and we believe that the company has limited risk in this area.

Disclosure: I 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.