MT Insider: Momentum Continues at Nike Post Q1 Earnings, Upside Potential to $110


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Last night, Nike ( NKE ) reported stellar Q1 earnings, beating analyst estimates by a whopping $0.08, per Thomson Reuters.

The delta versus analyst estimates came from a timing shift of North American distribution center costs as well as a mix shift towards premium products, which command higher pricing.

Margins also benefited from lower input costs and less promotions while revenue momentum was attributed to growth in the Direct To Consumer (DTC) segment.

Moreover, running remained a leading category, with 15 consecutive quarters of double digit growth and double digit futures growth for Q1.

MT Newswires expects analysts to raise earnings and target prices this morning, with upside potential to $110.

As a recap, total futures orders were up 8% (which is a bit ahead of the street's 7.7%) with North America up 11% (versus street 9-11%), China up 3% (versus street 0%), Europe up 12% (versus street up 1-3%), and Emerging Markets up 1% (versus street 10%).

On the conference call management reiterated its outlook for its core business performance, but slightly reduced its revenue and earnings for the remainder of FY14 (due to increased currency headwinds). That said, the company expects a healthy 50 bps of gross margin expansion for both Q2 and FY14, respectively (which analysts applauded).

On valuation, NKE is currently trading at 23x earnings, which is low given the company's still high growth prospects in spite of its dominance in athletic footwear. This is especially the case considering Skechers USA ( SKX ) valuation, which trades at almost 30x earnings, Lululemon Athletica ( LULU ) at 40x earnings, and Under Armour ( UA ) at 50x earnings.

Upside case scenario - assuming mid-teens earnings growth and multiple expansion (catalysts include expansion outside of the US, particularly in China and Brazil) to 30x, which is on par with SKX, on FY15 earnings $3.70 would imply upside potential to $110.

Downside case scenario - assuming a tougher consumer environment coupled with macroeconomic softness would put pressure on gross margins and slow earnings growth. At a base multiple of 20x on FY15 earnings $3.50 would equate to a downside target price of $70.

The stock is currently trading up 6% at $75 in the pre-market.

NKE 74.84 +4.50 +6.40

SKX 30.34 0.00 0.00

LULU 72.25 0.00 0.00

UA 80.15 +1.04 +1.31

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing Commodities
Referenced Stocks: LULU , NKE , SKX , UA

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