Sell Nike Ahead Of 3Q'12 Earnings
We recommend selling Nike (NKE) ahead of its 3Q'12 earnings release on September 27 for a short-term speculative trade. Our bearish call is based on a combined assessment of what we believe to be useful predictive factors for earnings surprises and post-earnings stock price movements. These factors span key variables across valuation, analyst estimate trends and technical strength.
Valuation (slightly overvalued)
We believe Nike to be slightly overvalued both on an absolute and relative basis. On an absolute basis, Nike's 2013 P/E based on consensus analyst estimates currently stands at 16.4x, which we believe to be slightly overvalued given its projected 2013 revenue growth of 8% and EPS of 14%. On a relative basis, Nike is priced at a premium to its peer publicly traded comparables on U.S. stock exchanges, including Coach (COH) and Wolverine World Wide (WWW).
A summary comparables analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Nike and its comparables:
Sources: Company filings, Yahoo Finance.
Analyst Estimate Trends (bearish)
Current Analyst Estimates
Revenue estimates for Nike's current quarter range from $6.18bn to $6.63bn, with an average estimate of $6.41bn (+5.5% from $6.08bn 3Q'11), while EPS estimates range from $1.00 to $1.19, with an average estimate of $1.12 in EPS (-17.6% vs. $1.36 in 3Q'11).
While Nike has beaten EPS estimates in 3 of the past 4 quarters, it missed EPS by 15% in its most recent quarter. Recent analyst EPS estimate revisions are bearish, with 3Q'12 EPS being revised down from $1.38 (90 days ago) to $1.13 (60 days ago), and further to $1.12 (30 days ago).
EPS Surprise History (bearish)
EPS Estimate Revisions (bearish)
7 Days Ago
30 Days Ago
60 Days Ago
90 Days Ago
Source: Yahoo Finance
Technical Strength (bearish)
We believe Nike's underlying technical strength, as measured by its historical share price performance, to be bearish, with its Moving Averages and MACD technical indicators generally under bearish signals.
· 20-Day Moving Average: Bearish
· 50-Day Moving Average: Bullish
· 100-Day Moving Average: Bearish
· 20-50 Day MACD Oscillator: Bullish
· 20-100 Day MACD Oscillator: Bearish
· 50-100 Day MACD Oscillator: Bearish
Disclaimer: Earnings Speculator is a trading advisory service designed to capture alpha by predicting post-earnings moves of stocks through a detailed analysis of key predictive factors. While our goal is to generate consistent alpha over time through employing a long-term positive probability edge in our predictions, the ultimate performance of any one of our individual stock recommendations is highly uncertain. We strongly recommend allocating no more than 2% of your trading portfolio to each of our recommendations in order to sufficiently diversify your risk and to be well positioned for long-term alpha generation through focusing on the prediction of post-earnings share price movements.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.