Nike (NKE, Financial) was ruthlessly punished by investors after releasing its fiscal 2016 third quarter results. Company shares fell more than 4% Wednesday following Tuesday’s after-market earnings event. The decline came despite the company’s impressive third-quarter earnings results which beat analyst estimates by 7 cents.
Nike reported 55 cents EPS or a 22% increase from last year’s 45 cents while at the same time beating analysts’ consensus estimate of 48 cents.
However, the company came up short of revenue expectations after posting a top line of $8.03 billion, which represented 8% increment from last year’s figure of $7.46 billion (approximately 14% gain excluding currency changes). On the other hand, analysts were expecting Nike to report revenue of about $8.2 billion.
Nike through the years and now
Nike’s current revenue and net income numbers for fiscal 2016 third-quarter results registered one of the best sequential growths when compared to other subsequent periods.
Generally, the company’s best quarter has traditionally been the fiscal first quarter while fiscal second quarter has been the poorest. However, the transition from the fiscal second quarter to fiscal third quarter has not been better since 2010, which makes Nike’s most recent quarter interesting.
While Nike’s revenues have increased and fallen irregularly on a sequential basis per quarter, the year-over-year performance has demonstrated a cyclical pattern with consistent increments from period to period. This highlights the company’s seasonal nature.
Beyond recent earnings results
Nike is the world’s largest sportswear maker with a current market capitalization of more than $100 billion. The company reports annual revenues of more than $30 billion while its net income of about $3.6 billion suggests the company’s net profit margin is a double digit number. This makes it one of the best stocks to buy in the industry.
Nike currently boasts an operating margin of about 14%, which trumps the industry average of about 8% while its gross margin of 45% still dwarfs the peer average of about 39%.
Despite having a market capitalization of $106 billion versus Under Armour’s (UA, Financial) $18 billion, Nike still trades at a more attractive P/S of 3.53x compared to Under Armour’s 4.6x. Therefore, it makes little sense that investors rapidly dumped the stock after the company missed the revenue estimate.
Does stability come with size, age?
A squeezing top line is something common with mega-cap stocks like Nike. While these companies cannot offer much in terms of potential for future growth, they guarantee a continual stream of cash flow in the form of dividends.
For instance, Under Amour, which investors categorize as a growth stock, managed to increase revenues by 30% in the most recent quarter. However, its bottom line grew at a lower rate than Nike’s, at about 20%. This illustrates one of the biggest strengths of mature/large mega-cap stocks like Nike.
Even when the top line slows, the company is still able to report good numbers in earnings. As such, Nike promises stability, and this also explains why the company has an average five-year dividend yield of 1.21% from a payout of just 35%.
If Nike doubled its current dividend payout to reach the recommended threshold of about 70%, then it would be paying a dividend yield of close to 2.5%. That’s assuming EPS remains constant for now. On the contrary, Under Armour does not pay any dividends yet.
If you were considering investing based on valuation multiples like P/E, Nike would emerge the better stock once again. With a P/E ratio of 30.33x compared to Under Armour’s 78.93x, Nike is more attractive than Under Armour.
In summary
Despite the recent Nike selloff, the company is still a much better stock when you assess trading activity for February. Nike had a short ratio of just 1.35 compared to Under Armour’s 31.56x. Again this shows that, despite Under Armour’s promising growth prospects, investors felt safer to invest in a more stable stock like Nike as most of the global markets nosedived.
Therefore, when analyzing Nike as an investment opportunity, investors should stop worrying much about a slowing top line but rather pick the positives in the form of the company’s ability to improve the bottom line even when macroeconomic risks such as currency translations affect reported revenue.
Nike has a total cash of more than $6 billion versus a total debt of just over $2 billion while operating cash flow for the trailing 12-month period stands at about $4.2 billion. The company also boasts an impressive current ratio of 3.04x.
So, why would you want to dump shares of Nike? Unless you are specifically a growth-oriented investor, it’s hard to spot a better Sportswear and apparel stock in the market right now, especially given the current nature of global stock markets. Markets have proved to be extremely unpredictable over the last few months.
