After five years of strong growth in apparel and footwear, Nike's (NYSE: NKE) shareholders were rewarded with returns in excess of 100%. These returns greatly outpaced the 80% return delivered by the S&P 500 (NYSEARCA:VOO) over the same time frame. Unfortunately, 2016 was a tough year for Nike's shareholders. Holders of Nike's stock witnessed the stock price tumble over 15% when the S and P 500 exploded to all time highs. While short term gains are less important to long term investors, Nike is poised for a strong rebound in 2017; because of four key reasons.
1. Earnings and sales growth
Despite another strong year of earnings and sales growth, Nike sold off due to: a strengthening dollar and stiff competition from Adidas (OTCQX:ADDYY) and Under Armour (NYSE:UA)(NYSE:UAA). While these companies are formidable competitors, consensus estimates suggest Nike is set to grow earnings and sales nearly 8% in 2017. Earnings are expected to rise from $2.16 to $2.33 and sales from 32 billion to almost 35 billion. Meanwhile, the most recent read on consumer confidence measured by the university of Michigan study showcased confidence levels expanding to levels not seen since 2004, rising from 93 in November to 98 in December. These types of indicators are harbingers of consumers purchasing habits, and consensus estimates in 2017 are likely too low.
According to Warren Buffett, "Price is what you pay and value is what you get." A resounding truth, and fortunately for Nike, its price to earnings or PE ratio is at ten year lows relative to the S&P 500. In fact, Nike's PE ratio of 23 is trailing that of the S&P 500 which trades close to 26 times earnings despite much lower projections for earnings growth. As a result, I believe this trend will reverse in 2017 as the broader investment community becomes more comfortable with Nike's growth rates and rewards it with a higher multiple on earnings. Nike will also benefit from a smaller share count as it continues to buyback shares at a rapid pace. Nike announced a massive 12 billion dollar buy back in November of 2015. Another potential catalyst for Nike is Trump's proposed cut to the corporate tax rate from 35% to 15%, stay tuned.
3. Market Share
While Nike has been ceding market share in recent years to up and coming Under Armour and Adidas, Nike still controls almost 50 % of the athletic footwear market in the United States and around 30% of the total athletic apparel market around the world. The emergence of stars like Stephen Curry and Cam Newton for Under Armour and James Harden and Kanye West for Adidas are fueling this growth. However, Nike still has the deepest pool of decorated athletes, universities and sports leagues in the United States and globally headlined by major deals with the NFL and NBA. It should be noted that Adidas inked a deal with the NHL in 2015, and Under Armour recently hooked up with the MLB to provide uniforms starting in 2020. Despite these major wins, according to Statista, Nike is set to control 27% of the gargantuan 180 billion athletic apparel market by 2020. This dwarfs even the most optimistic projections for Adidas and Under Armour.
4. Basketball Footwear
In 2015 and 2016, Nike lost momentum in basketball footwear sales due to the rise of Under Armour's flagship athlete, Stephen Curry. Since Stephen Curry won MVP awards in 2015 and 2016, Under Armour launched 2 wildly successful basketball shoes, the Curry 2.0 and 2.5. Fortunately for Nike, Under Armour's momentum was stymied when its superstar athlete, Kevin Durant joined the Golden State Warriors. The effects of this move are already being felt by Under Armour. According to Footlocker (NYSE:FL) CEO Dick Johnson, "The 2.0 and 2.5 Curry shoes in the third quarter performed well. The 3.0 is fairly new into the business. It started off a bit slower than the two previous models."
Shortly after joining the warriors, Nike launched a successful line of KD9 shoes in a number of different colors priced at $150. While new threats are emerging from Adidas after launching the Harden Volume 1 in November, Nike can fend off this threat with it's collection of signature shoes from high profile NBA stars. Currently, Nike has signature lines for Lebron James, Kobe Bryant, Kyrie Erving and Michael Jordan priced between $100-$300. We also received news that Nike is releasing a new signature shoe priced at $110 for Paul George in the near future. The initial impressions have been positive, and Paul George will debut these shoes in London on Thursday, January 12th against the Nuggets.
Even though Nike's stock performed poorly in 2016, things will improve in 2017 because of its solid growth prospects, cheap valuation, star studded cast of athletes and sports leagues around the world and growing momentum in basketball footwear. It is easy to get emotional and bearish when stocks don't perform well over short time frames, but investors who stick with Nike will be rewarded. Competition from companies like Under Armour and Adidas are emerging, but it's certainly not time to ring the alarm. By 2020, the athletic apparel market is set to grow immensely to over 180 billion dollars, and no company is better positioned to take advantage of this growth than Nike. It's time to take a closer look at this dog of the Dow Jones Industrial Average (NYSEARCA:DIA). If you are thinking about establishing a position, it may make sense to, "just do it."
Disclosure: I/we 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.
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