Nike’s (NKE, Financial) shares have pulled back considerably since the company’s last earnings report. The stock is currently trading 20% under its 52-week high level, and while its valuation at 26x trailing earnings may seem a bit stretched, I think the pullback is a great buying opportunity.
Strong Performer
Nike performed very well in the previous year and is off to a great start this year. The reason behind the company’s success is its popular brand name, as well as its worldwide visibility. As per Interbrand, Nike managed to hold 17th place overall during the previous year, with a brand value of approximately $23.1 billion.
On the other hand, Nike accounts for one of the top growing companies in Interbrand’s yearly rankings, showing a 16% brand value surge compared to 2014. Furthermore, the company’s expansion in other countries is another significant source of long-term growth.
The company worked hard between 2010 and 2015, as it doubled its emerging market sales, as well as projects further 60% plus growth cumulatively from emerging markets in the duration between 2015 and 2020. As a matter of fact, the company’s focus on athleisure will prove to be a key driver for the company’s growth. Further, the company has a smart strategy of aggressively focusing on a surging customer base of active women.
Apart from this, the company is also strategizing to turn to e-commerce to enhance its sales in the international market, as well as in the U.S.
Profit Growth
Recently, Nike’s earnings took a feeble hit, down 2% y-o-y, due to inventory challenges that declined gross margins.
At present, the company’s management is well aware of this issue and is working to overcome the problem. However, for FY16, net income surged 15%, and net profit margin escalated to more than 11.6%, an outcome of superior cost management.
Considering the 11.6% profit margin is constant, the $50 billion top-line projection for FY20 would result in earnings of around $5.8 billion, which would justify Nike’s current valuation. Since Nike’s profits are expected to be strong for the long-term, I think investors should look at the recent pullback as a great opportunity.
Conclusion
Nike has been a great long-term performer and this trend will likely continue in the future. With the company’s earnings expected to grow consistently, I think the recent pullback should provide a great entry point for long-term investors.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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