NIKE Inc. (NYSE:NKE) is engaged in the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. The Company’s operating segments include North America, Western Europe, Central and Eastern Europe, Greater China, Japan and Emerging Markets. Its portfolio of brands includes NIKE, Jordan, Hurley and Converse.
Source: Thomson Reuters
We believe that NKE is undervalued in the market at current price. The company, despite recent headwinds, has valuable brands and solid financials. We believe that the headwinds the company is facing to be temporary and NKE is taking steps to address the issues via steps like expanding their Direct to Customer (DTC) efforts. We believe that after posting an earnings beat in its latest quarter results, NKE is poised for a rebound and is at an attractive entry price.
Recent Price Action: NKE share price tumbled in August after negative news from athletic apparel retailer Foot Locker reported poorer sales than expected. The news caused investors to fear that this indicated that NKE would also subsequently report poorer sales. From a 52 week high of USD 60.53, NKE fell more than 15% to USD 50.79. Since then, NKE reported a Q1 2018 earnings beat and essentially flat revenue, allaying fears that its sales would be as negatively impacted by Foot Locker’s poor sales.
NIKE Direct: NKE introduced a new initiative, Consumer Direct Offence, aimed at allowing NKE to serve customers personally, at scale. As part of this initiative, NKE has accelerated the rollout of new technology such as ZoomX, Air VaporMax and Nike React.
NKE has also created the Nike Direct organization, which combines NKE’s direct to consumer efforts such as Nike.com and Direct to Consumer retail. We believe that NKE’s Direct to Consumer efforts are important as selling direct to the consumer. It allows NKE to cut out the middleman, generating greater margins for the company. Digital and mobile avenues to purchase NKE goods also follow the trend to e-commerce. In the Q1 2018 results, NKE reported an 11% growth in its NIKE Direct business, with online growth of 19%.
NKE’s Direct to Consumer efforts are also important as they represent a bright spot in its domestic North American market, its single biggest segment at about 44% of total revenue. While NKE’s North America revenue for FY17 was only up 3% YoY, its Direct to Consumer sales for the region were up 9%.
International Markets: While North America is the single largest segment, NKE is a global company, and international markets account for 56% of revenue. Until recently, the strong US dollar represented a headwind against NKE, however, recently the USD has weakened, which should provide a tailwind on the foreign revenue.
In FY2017, Greater China accounted for about 13% of NKE’s revenue, up 12% YoY, excluding currency changes; Greater China’s growth was 17%. Western Europe was up 6% YoY and 11% excluding currency changes. As such, it can be seen that Forex affects NKE’s results significantly and a weakening USD will help boost NKE’s numbers.
Besides Forex, international markets remain important growth segments for NKE, especially as it faces slow growth in its domestic market. Greater China grew 9% (12% excluding currency) in its most recent quarter. With revenue from China at about 25% of North America, it is encouraging that China’s growth story remains strong for NKE.
Valuations: NKE closed at USD 53.42. It trades at a PER of 22.82, which is below its 5 year average of 25.72. It has an Operating Margin of 12.19% and a Net Profit margin of 10.47%. NKE pays a dividend of USD 0.72, representing a yield of about 1.35%, with a payout ratio of 0.31. NKE has 8 years history of consecutive dividend growth, with its low payout ratio and high Free Cash Flow, twelve months trailing as of Aug 2017 was USD 2.33 bn, leads us to believe that NKE has a lot more room to continue growing that dividend. NKE has a history of increasing its dividend in the last quarter of the calendar year, which is the next quarter when it reports and we believe that NKE should announce a dividend hike.
Technicals: Since hitting a new record high of 68.19 in December 2015, NKE has been dwindling lower while keeping the long-term uptrend intact. From the December 2015 peak to the recent trough in November 2016, NKE has lost 28% of its market value, but the 50.00 psychological support area seems to be providing a secure floor here to the long-term uptrend. To be exact, the 50.81 level is where multiple sharp bullish rejections occurred, lifting price higher. Moreover, that support area also coincides with the 50% Fibonacci retracement level and 200-week moving average making this a stronger support area.
NKE Weekly chart – strong support off the 50.00 psychological area
Source: Bloomberg, PSR
Support 1: 50.81 Resistance 1: 56.59
Support 2: 49.00 Resistance 2: 60.21
Red line = 20 period moving average, blue line = 60 period moving average, Green line = 200 period moving average
In total, there were three major episodes where the 50.81 support area proved to be an important area to watch as the prior selloff was halted shown by the highlighted boxes. The first occasion happened in October 2016 where a false breakout below the 50.00 psychological support area happened only for a week. After which, buying quickly regained strength and halted the selloff to experience an 18% advancement.
A similar bullish price action appeared again later in May and June 2017 where the 50.81 support area firmly reversed the prior selloff and recovered 12% from the 50.81 low.
Fast forward to current scenario, the selloff since July 2017 has once again taken price back down to retest the crucial 50.81 support area recently. The long-term uptrend appears to be holding up well as the 50.81 support area succeeded in halting the selloff in the week ended 20 October 2017. Moreover, the bullish rejection has also resulted in price forming a Bullish Engulfing Bar in the week ended 20 October 2017 signals a reversal back into the long-term uptrend.
We are expecting the 50.81- 50.00 support area to hold up once again like the previous three episodes to target a retest of the 60.21 resistance area next.
Conclusion: We are bullish on NKE due to 1) its Direct to Consumer efforts, 2) International market and forex tailwinds and 3) its dividend and valuation. As such, we believe that stock has been oversold and with recent signs of recovery, we are bullish.