Nike's Stock Has Fallen Following Its Q2 Earnings Beat, Should You Buy On The Dip?

| About: Nike Inc. (NKE)
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Summary

Q2 2015 earnings were released on December 18.

Earnings per share and revenue beat expectations.

Footwear sales increased 18.1% during the quarter.

Repurchased 5.1 million shares of its common stock for $425 million.

The stock has reacted by falling about 2%.

Nike (NYSE: NKE), a leading designer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories, released second quarter earnings after the market closed on December 18, with both earnings per share and revenue surpassing Wall Street's expectations, but its stock has reacted by falling about 2% in the after-hours trading session. Let's take a closer look at the results to determine if we should use this weakness as a long-term buying opportunity or if we should wait for an even better entry point in the trading days ahead.

The Better-Than-Expected Results

Here's a summary of Nike's second quarter earnings compared to what analysts had expected and its results in the same period a year ago:

Metric Reported Expected Year Ago
Earnings Per Share $0.74 $0.70 $0.59
Revenue $7,380 million $7,161 million $6,431 million

Nike's earnings per share increased 25.4% and its revenue increased 14.8% compared to the second quarter of fiscal 2014; these results were driven by footwear sales increasing 18.1% to $4,266 million, apparel sales increasing 11% to $2,285 million, and equipment sales increasing 2.7% to $380 million. Here's a breakdown of the company's revenues and revenue growth by division (in millions):

Division Q2 2015 Revenues Q2 2014 Revenues Change
North America $3,241 $2,801 15.7%
Western Europe $1,312 $1,074 22.2%
Central & Eastern Europe $346 $295 17.3%
Greater China $758 $629 20.5%
Japan $199 $210 (5.2%)
Emerging Markets $1,075 $1,030 4.4%
Converse $434 $360 20.6%
Global Brand Licensing $28 $31 (9.7%)
Corporate ($13) $1 NM
Total $7,380 $6,431 14.8%

Nike's gross profit increased 17.7% to $3,327 million and its operating profit increased 22.9% to $887 million in the second quarter, as its gross margin expanded 120 basis points to 45.1% and its operating margin expanded 80 basis points to 12%; these strong results were driven by costs of sales increasing just 12.4% during the quarter, which was far outpaced by the company's 14.8% revenue growth.

During the quarter, Nike repurchased 5.1 million shares of its common stock for approximately $425 million. The company went on to note that there was approximately $3.3 billion remaining for repurchase under its $8 billion share repurchase program that was authorized in September of 2012, and it ended the quarter with $2.27 billion in cash and cash equivalents, so it could easily accelerate repurchases in the second half of the year.

Lastly, the company reported that as of the end of the quarter, worldwide futures orders for Nike brand athletic footwear and apparel scheduled for delivery from December 2014 through April 2015 were 7% higher than orders reported in the year ago period; it also noted that on a constant currency basis, reported orders would have increased 11%.

Should You Buy Nike On The Dip?

Increased demand for Nike's products led to a very strong second quarter performance; the company reported year-over-year increases in earnings per share, revenue, gross profit, and operating profit, all while expanding its margins, but its stock has responded by falling about 2% in the after-hours trading session.

I think this post-earnings dip in Nike's stock represents a picturesque long-term buying opportunity, because it trades at inexpensive forward valuations; take a look at this chart of analysts' full year earnings per share estimates for fiscal 2015 through fiscal 2017 and its price-to-earnings multiple based on its current share price:

Fiscal Year 2015 2016 2017
Estimated Earnings Per Share $3.61 $4.15 $4.81
P/E Ratio At Current Levels 26.2 22.8 19.7

In addition, Nike pays an annual dividend of $1.12 per share, which gives its stock a respectable 1.2% dividend yield at current levels, making it both a value and dividend play. With all of this information in mind, I think Nike represents one of the best long-term investment opportunities in the market today, so investors should take a closer look and strongly consider initiating positions today.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.