Billionaire Bill Ackman and his fund Pershing Square Capital were busy scooping up shares of Nike (NYSE: NKE) in the second quarter. The hedge fund manager runs a very concentrated long portfolio, holding only nine stocks as of the end of the second quarter. Let's look at what may have attracted Ackman to the stock.
An iconic brand
Nike is an iconic brand whose swoosh logo is one of the most recognizable in the world. In the U.S., the company has about 97% aided brand awareness, while its products are well known around the globe.
Nike has been able to forge a reputation as a leader in innovation and style in the sports apparel and footwear space over the years. The company is also a marketing machine. It has endorsement deals with some of the most popular athletes from around the world. It has also branched out to non-athletes with musicians and other celebrities.
Brand equity is hugely valuable and Nike has built an unmatched reputation in the sports apparel and footwear space over the years. It has a loyal following and a strong reputation.
Image source: Getty Images.
Turnaround potential
Despite its strong brand, Nike has had its share of struggles recently. It only grew revenue a scant 0.3% its last fiscal year, ended in May, while fiscal Q4 sales fell nearly 2%. To make matters worse, the company projected its fiscal 2025 sales to decline by mid-single digits after saying in March that it expected sales to rebound in the second half and to see full-year sales growth in fiscal 2025.
Nike forecast Q1 sales to drop a whopping 10% in its fiscal Q1, and for the first half it now sees high-single-digit declines. Among the reasons behind its dour forecast were a soft wholesale order book, challenges in its digital business, a difficult Chinese market, and the aggressive actions it is taking to manage its classic footwear franchises.
However, one tried-and-true method of helping reinvigorate a stock is to set low expectations and then pole vault over them. Given that Nike was just front and center at the Olympics, it appears the company was doing just that when it projected such a large sales decline in fiscal Q1.
The company showcased a number of new products and spent heavily on marketing around the Paris Summer Games. Those efforts appear to have paid off, with web analytics company SimilarWeb showing a surge of visits and sales to its website during the Olympics.
While a boost in sales from the Olympics doesn't solve all of Nike's problems, it could help it leap over a low fiscal Q1 bar. Meanwhile, it also shows that the brand can continue to resonate with consumers and that with the right marketing, endorsements, and product innovation, the company can get back on track over the long run.
Discounted valuation
Given its brand power, Nike has always traded at a premium valuation since it takes a very long time to build the type of brand equity it has. However, the company's recent struggles have seen its valuation drop considerably. The stock now trades at a price-to-earnings (P/E) ratio of under 22.5, which is well below the over 30 times it has often traded at the past several years.
NKE PE Ratio (Forward 1y) data by YCharts
While the company is predicting some sales (and earnings) declines this year, I don't think it will be as bad as forecast. Meanwhile, Nike is trading at one of its most attractive valuations in quite some time.
Should investors follow Ackman and buy Nike stock?
I currently think the setup for Nike looks attractive both in the short and medium term. In the near term, the company has set low expectations, which I think it will thoroughly beat. Meanwhile, I think the Nike brand is still powerful and resonates with customers.
While the company has some work to do to get back on track, its brand equity is undeniable and it has a long track record of success. I see no reason why Nike shouldn't continue to be a long-term winner. As such, I'd follow Ackman into the name and be a buyer of the stock around current levels.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
