Nike Earnings Pullback Could Be A Unique Buy Opportunity

  • Nike stock retreated after earnings failed to meet expectations.
  • The problem lay in the expectations, not the company performance.
  • The growth story here remains very much intact.

Nike (NYSE:NKE) stock fell over 4%, or $3/share, after earnings disappointed analysts last week.

It could be a unique buying opportunity. While the numbers didn't hit expectations, those expectations were severely inflated. The company's growth story remains intact, and buying into it could lead to profits down the road for patient investors.

For the quarter revenues were up 8%, 14% in constant currency, and future orders were up 12%, 17% in constant currency. Earnings per share were up 22% over the previous year, to 55 cents/share. The transition from the era of founder Phil Knight is now in the rear-view mirror, there is a 51-year old COO in Eric Plunk ready to take over from 60-year old CEO Mark Parker, and the company is moving full steam ahead.

Previous quarters had seen Nike beat estimates, giving investors a quick reward. In August shares rose about 20% after earnings, and in December, they did it again, as Nike announced a dividend increase and a 2:1 stock split. If you bought 100 shares at $100 a year ago, you now have 200 shares at $60 each, plus 60 cents/share in dividends on those 200 shares.

Nike’s numbers look more like a technology stock than an apparel maker. In fact, they look a little better than tech leaders like Alphabet Inc-A (NASDAQ:GOOGL) because Nike is able to hold margins constant, bringing about 10% of revenue to the net income line, even as revenues grow 10% per year. This means it can cover dividends more than three times over, plus continue to invest in research and marketing.

So the fact that Nike stock dropped 5% after its most recent earnings announcement, last week, should not disturb an investor with a long-term time horizon of 3-5 years. Over the last 10 years, Nike stock has risen over 400%, with three stock splits and dividends that did not even drop during the Great Recession.

The bear case is that Nike is fully valued and that rival Under Armour (NYSE:UA) is catching up thanks to endorsers like Steph Curry. But Nike is strong across all sports, and athletic apparel is increasingly what people wear everywhere, even executives at work or making presentations.

While companies offering more formal work clothes, like Nordstrom (NYSE:JWN) and Men’s Wearhouse continue to falter, unable to hold their retail margins, Nike and Under Armour continue to gain clothing share, with Nike firmly in the lead, and with margins stable.

So this is not an in-and-out stock. Nike stock is one you buy and you hold. When you can get it at a discount because expectations got a little ahead of themselves, you jump on it. You buy some, you put it away, and you look at it with pride five years from now.

Dana Blankenhorn Dana Blankenhorn   on Amigobulls :
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  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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