Sell Nike Ahead Of Q3 Earnings

Sep.24.12 | About: Nike Inc. (NKE)

Sell Nike Ahead Of 3Q'12 Earnings

We recommend selling Nike (NYSE: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 (NYSE:COH) and Wolverine World Wide (NYSE:WWW).

A summary comparables analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Nike and its comparables:

Valuation Multiple

Market
Cap

Enterprise
Value

P/2013
EPS

P/2012
EPS

EV/2013
Revenue

EV/2012
Revenue

NKE

44,001

40,626

16.4x

18.8x

1.5x

1.6x

COH

16,147

15,254

12.8x

14.7x

2.6x

2.9x

WWW

2,135

2,006

13.6x

17.0x

0.7x

1.4x

Click to enlarge

Growth

Revenue
Growth

EPS
Growth

FY13

FY12

FY11

FY10

FY13

FY12

NKE

8%

5%

16%

10%

14%

9%

COH

11%

11%

15%

15%

15%

9%

WWW

88%

1%

13%

13%

25%

4%

Click to enlarge

Profitability

Gross
Margin

EBIT
Margin

FY11

FY10

FY09

FY11

FY10

FY09

NKE

43.4%

45.6%

46.3%

12.6%

13.5%

13.0%

COH

72.8%

72.7%

73.0%

31.7%

31.4%

31.9%

WWW

39.5%

39.5%

39.2%

12.1%

11.6%

10.5%

Click to enlarge

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)

2Q'12

1Q'12

4Q'11

3Q'11

EPS Estimate

1.17

1.20

1.00

1.36

EPS Actual

1.37

1.17

0.97

1.21

% Surprise

-15%

3%

3%

12%

Click to enlarge

EPS Estimate Revisions (bearish)

FY14

FY13

4Q'12

3Q'12

Current

5.87

5.14

1.02

1.12

7 Days Ago

5.87

5.14

1.02

1.12

30 Days Ago

5.87

5.13

1.02

1.13

60 Days Ago

5.88

5.17

1.02

1.13

90 Days Ago

6.68

5.79

1.19

1.38

Click to enlarge

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.

Moving Averages

· 20-Day Moving Average: Bearish

· 50-Day Moving Average: Bullish

· 100-Day Moving Average: Bearish

MACD

· 20-50 Day MACD Oscillator: Bullish

· 20-100 Day MACD Oscillator: Bearish

· 50-100 Day MACD Oscillator: Bearish

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.

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.