Nike: Bullish Investors Overlook Supply Chain Bottlenecks and Focus on Digital Growth
In recent weeks, we’ve started to see a common theme here, when it comes to the most talked about stocks by the analysts, journalists, and bloggers that we track. So much of the chatter appears to surround highly valued blue chip stocks that have experienced a bit of a pullback during recent weeks. This doesn’t come as a surprise. We know there have been investors sitting on the sidelines with money to invest, watching best-in-class growth plays rise for several years now. It has been very difficult for value oriented investors who find themselves in this position to put their capital to work, because of premium multiples in the marketplace. And, any sense of a dip is going to be enough to really grab their attention.
From a broad market perspective, we’ve discussed overvalued recently. The S&P 500’s (SPY) forward price-to-earnings ratio is approximately 21.7x right now. This represents a 21.9% premium when compared to the 17.8x 5-year average forward price-to-earnings that is attached to the SPY. What’s more, it represents an even steeper, 36.5% premium when compared to the S&P 500’s 10-year average multiple of 15.9x.
And, when looking at the charts, it’s clear that fundamental growth was not the major catalyst for the market’s strong rally in recent years, but instead, it was due to rising bullish sentiment and the multiple expansion that it inspired.
The leaders of the recent rally, especially, have seen their share prices benefit from multiple expansion and today’s topic, Nike (NKE), is no different. Nike shares are no strangers to elevated premiums. During the last 5 years, NKE’s average blended price-to-earnings ratio has been 28.7x. The company’s 10-year average blended price-to-earnings ratio is 25.1x. Both of these figures are far above the broad market averages.
And recently, Nike shares have risen to the highest valuation that they’ve seen in decades, trading for 56.7x earnings at their recent 52-week highs. Yet, this multiple comes during a time when Nike has struggled to generate bottom-line growth. The COVID-19 pandemic caused Nike’s earnings to fall -36% during its fiscal 2020. And, while it appears that the company has bounced back strongly, with analyst consensus estimates for the company’s fiscal 2021 EPS growth rate coming in at 95%, the stock is still trading for more than 44.3x the estimated 2021 earnings figure.
However, in recent weeks, Nike’s strength has waned. So, what changed? Nike reported earnings on March 18th, missed expectations on both the top and bottom lines, and simply put, when a stock is priced to perfection and doesn’t post pristine numbers, shares are bound to fall.
Richard Saintvilus recently highlighted Nike’s pre-earnings momentum in an article on NASDAQ.com, noting that shares had risen roughly 120% during the year prior to the Q3 results, and roughly 7% during the week running up into the quarterly print.
Saintvilus said, “Nike is benefiting from the fact that consumers across the globe have developed an increased focus on health and wellness, sparked by the pandemic. What’s more, concerns about weak consumer spending and a delayed COVID relief package has been removed with the recent $1.9 trillion stimulus. As such, Wall Street sees Nike strongly positioned to capitalize on increased demand for its products like shoes and apparel.” However, as the quarterly results showed, the company’s growth is immune to macro headwinds, which caused the company to falter during the recent reporting season.
Jon Quest, a 5-star analyst who writes for The Motley Fool, highlighted the company’s disappointing top-line results, saying, “For the third quarter, Nike reported revenue of $10.4 billion, which was technically up 3% year over year. But there are a few meaningful clarifications to make. First, adjusting for currency fluctuations, the company's revenue was down 1%.”
Quest also highlighted a quote from Nike’s CFO Matthew Friend from the third quarter conference call, where he mentioned the company’s woes, saying, "In Q3, disruption in the global supply chain due to container shortages, transportation delays, and port congestion has interrupted the flow of inventory supply."
The company’s share price recently fell 4.9% after reporting its fiscal third quarter earnings results. And, shares have not recovered since, hovering in the high $130 range, which is down roughly 6.5% from the company’s 52-week high of $147.65 that it set back in January. However, as more and more analysts have parsed through the results, we’re seeing a bullish lean re-appear.
Of the 5-star journalists/bloggers who have published opinions during recent weeks, we’ve tallied 22 buy ratings as opposed to just 12 sell ratings. The stock also appears to be popular amongst the retail investor crowd, with Will Ebiefung of The Motley Fool recently noting that “Penn National Gaming (PENN) and Nike (NKE) are two companies that rank among the top 100 most widely-held stocks among users of the platform.”
And, it’s not just the retail traders who’re looking to buy shares. The average price target amongst the 4 and 5-star professional analysts that Nobias tracks is currently $169.10, which points towards near-term upside potential approximately 22.5%.
While it’s true that the company’s valuation is high and its earnings growth slowed to an unexpected halt during the most recent quarter, the overarching theme that encompasses bullish commentary regarding Nike’s stock revolves around its direct-to-consumer business and the high margins that such sales generate.
Lucas Manfredi, of Fox Business, recently touched upon Nike’s DTC success, saying, “Nike Direct -- which operates both digital outlets and a network of company-owned stores -- registered a 20% increase in sales pulling in $4 billion. Its digital operations alone saw revenue soar 59%.”
Saintvilus touched upon Nike’s DTC segment as well, saying, “The DTC business, which accounts for 32% of revenue, not only allows Nike to control the consumer shopping experience, it also generates higher profit margins for the company. “ And after noting the company’s top-line struggles, Quest changed tunes, noting that even though Nike missed analyst estimates on the bottom-line during Q3, the company’s cash flows continue to grow steadily. He said, “The company reported net income of $1.4 billion, which was up a whopping 71% from last year. Furthermore, the company now has cash, cash equivalents, and short-term investments of over $12.5 billion.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Because of this bottom-line success and the growing size of Nike’s cash hoard, Quest believes that the company will re-start the buybacks that it paused during 2020 because of COVID, which has the potential to lift the company’s earnings-per-share figure even higher moving forward. And, the buyback isn’t the only reason to own this stock.
SGB Media also published a note recently which highlighted Nike’s shareholder returns, saying, “Nike continues a strong track record of investing to fuel growth and consistently increasing returns to shareholders, including 19 consecutive years of increasing dividend payouts. The company paid dividends of $434 million to shareholders in the third quarter, up 14 percent from the prior year.”
Global bottlenecks in the supply chain continue to be a short-term issue that Nike is going to have to overcome, but the continued growth of Nike’s digital sales point towards a bright future for the company as it navigates a changing retail landscape.
Nike’s digital sales have grown by 79%, 83%, 80%, and 59% during the last 4 quarters alone. John Ballard, of The Motley Fool, sums up the digital/DTC oriented bullish sentiment which still surrounds this stock in his recent article by saying, “It's difficult to predict where the stock goes in the short term, but Nike remains one of the best consumer discretionary stocks to buy. It's ahead of the game in e-commerce, which positions the company well to deliver market-beating gains for investors.”
Disclosure: Nicholas Ward has a long position in Nike. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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