Buy Nike Ahead of Earnings – Just Do it!

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

Forgive my weakness and shameful tossing of the “just do it” slogan. Call it “trite” if you must, however when it comes to Nike (NYSE: NKE) there’s no other brand that inspires one into action – whether or not at the risk of ridicule. From an investment standpoint, the same proves true. My failure was that "I didn't."

I once made the mistake of waiting for a lower price on Nike that just never materialized. Today, with the stock currently trading at $97 and with a price-to-earnings ratio of 21, I’m in the same predicament - it still looks too expensive. And it does not help that there continues to be rumblings from analysts about slowing fundamentals. Is it true?

On the other hand, when compared to rivals such as Under Armour (NYSE: UA) and trendy names like Lululemon (NASDAQ: LULU), Nike’s stock is trading very reasonably. Too, the stock is down 15% from its 52-week high and is in the midst of a holiday quarter when the shares typically “run.” If it does, I don't want to chase it. So what does an investor do?

First quarter review – is there a buy signal?

The company is due to report second quarter earnings on Thursday. With early indicators pointing to a great buy opportunity, let’s examine what Nike did in its Q1 report and see if we can get some confirmation. It wasn’t a great quarter but it was far from terrible.

Bad news first - for the period ending in August, net income dropped 12% year-over-year to $567 million. Likewise, diluted earnings per share shed 10% $1.23 - reflecting a 3% decline in common shares outstanding (weighted average). Obviously, the market issued no applauses for this – sending shares down almost 10%. But it seemed overdone.

Consumers still loved the brand as evident by the 10% increase in revenue – reaching $6.7 billion. On a constant currency basis, this is enough for 15% increase year-over-year. Absent foreign currency conversion rates, the company’s revenue actually rose 16% - including increases across all categories.

However, analysts chose to focus solely on the bottom line. No fault there. It seems Nike’s margins were hurt by increased pressure from the competition, which hurt its gross margins. Plus the company was adversely impacted by higher SG&A and an increased tax rate. Nonetheless, this quarter’s slight disappointment should not detract from Nike's long-term strength as a company.

Expectations for the second quarter

For this current quarter, analysts have forecasted earnings of $1 per share, which would be flat year-over-year. But it’s a penny higher than where estimates were several weeks ago. So that’s a positive sign. On the other hand, it’s still below estimates of $1.01 per share that was set three months ago.

Analysts are calling for $5.24 per share in earnings for the full fiscal year with revenue reaching $25.3 billion. For the current quarter, sales are expected to arrive at $5.99 billion, which would represent year-over-year growth of 4.5%. This seems a bit too conservative since Nike has grown revenues by an average of over 10% the past two quarters.

Plus it does not help that Lululemon has recently set the bar pretty high with 37% jump in revenues. It’s also a concern that Lululemon’s popularity in the U.S. has the company thinking of international expansion where Nike is now dominant. Will it work? After all, Lululemon is where Nike was 20 years ago.

On the other hand, it doesn’t appear as if Nike is concerned about this and nor does the company consider Lululemon to be an immediate threat. But Under Armour is and the company has been gaining traction and stealing market share – particularly with its trademark moisture-wicking materials. I think Nike would be wise to not take Under Armour for granted.

Bottom Line

Despite the looming threats however, Nike remains poised for more growth – albeit not to the extent when Michael Jordan was on every billboard and television network, but still good enough. For that matter, for a company the size of Nike that is still growing revenues in the mid double-digit levels solidifies its status as the leader with a superior brand.

I would venture to say that the company is on the same “world level” as Coca-Cola and McDonald’s. What’s more, Nike has very little debt and ended the quarter with over $3.2 billion in cash and an annual free cash flow of $2.3 billion. To top it off, the company pays a decent yield. Just do it – buy the stock!

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, 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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