Nike Earnings Preview: Great Expectations

Robby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nike (NYSE: NKE) is scheduled to release its second-quarter earnings of FY 2013 on December 20. Here’s what investors are looking for, and what you should expect to see as a result of those earnings.

Positive Surprises, Negative Surprises

Nike has consistently reported strong revenues, meeting or exceeding estimates for five straight quarters, and the company’s earnings per share exceeded analysts’ expectations in four of the past five quarters. This trend of such positive news has put added pressure on the company to meet or exceed estimates, and the December 20 earnings release will be scrutinized by investors worldwide.  Some companies are unaffected by their quarterly results; if investors have low expectations, that sentiment is priced into the stock before earnings are announced. Nike isn’t one of those companies. The stock is priced with the expectation that the company will perform well. Mr. Market won’t react lightly to a negative earnings surprise from Nike.

As previously mentioned, the company’s EPS performed well in four of the past five quarters; the holdout was Q4 of FY 2012, released June 28, which resulted in a negative earnings surprise of nearly 15%. Nike shares plunged 10% on the news. Conversely, Nike’s three straight quarters of positive earnings surprises (between Q1 and Q4) saw a steady bull run of its share price, reaching as high as 20%.

Investor Sentiment

Currently, analysts seem to be unanimously bullish toward Nike stock. HSBC recently upgraded Nike from “Neutral” to “Overweight,” and 95% of all Motley Fool CAPS players rate the stock “outperform.” In preparation for this article, I tried relentlessly to find perspectives from the bulls and the bears, but I was hard-pressed to find any from the bears. The few arguments I found that spoke negatively about Nike were a bit passé; one Nike bear cited the Tiger Woods marital scandal from three years ago as a reason to sell the stock. Another bear argument spoke of poor global economic conditions – a more valid point, in my mind.

The bulls, on the other hand, have much to discuss. Most often cited as Nike’s principal competitive advantage is the company’s incomparable brand power. The company is famous for its marketing prowess, strategically signing elite athletes to represent the company and exhibit its products. There are few companies as iconic as Nike.

Competition

Under Armour (NYSE: UA) is a worthy competitor. The company has beaten EPS estimates in every one of the past five quarters, the company’s revenues have met or exceeded expectations in all of the previous five quarters, and the company has been growing at a furious pace.

Adidas (NASDAQOTH: ADDYY) is a large player in this industry, and although the company has a recognizable brand across the globe, its earnings are erratic and its revenues haven’t experienced nearly the growth of Nike or Under Armour. The investment banking firm Cantor Fitzgerald recently downgraded the stock to “sell,” and the equity research firm AlphaValue  issued a “reduce” rating. But not every firm agrees with the bearish sentiment; Exane BNP Paribas has an “outperform” rating on Adidas, reiterated just two weeks ago.

Quarterly Earnings Bottom Line

Try not to make knee-jerk reactions when earnings are released. Don’t give too much precedence to a daily price movement based on a single quarter’s earnings; quarterly data comes out every three months, and although drastic movements in the stock price bait your emotions to buy or sell, you should resist this temptation. Emotion-laden investment decisions are rarely successful. You should consider every investment decision you make in the context of the company you’re investing with, not in the context of the noise of the market.


Robby Greengold has no financial interest in any of the companies mentioned, but owns one pair of Nike running shoes and two Under Armour longsleeve shirts.. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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