Event: NKE reports Q3 earnings Thursday morning after the close. The options market is implying about a 5% move, which is right in line with the 4 quarter avg of 5%, and slightly below the 8 quarter average of 6%
Sentiment: Wall Street analysts are somewhat bullish on the name, with 10 buys, 13 holds, and no sells.
Fundamentals: NKE announced a $8 billion buy back last week, a week before its earnings announcement. Traders didn’t seem to take it as very good news either, as the stock ended unchanged that day, and has been down each day since. NKE gets only 35% of its revenues from North America, and international weakness especially hurt results in the May quarter. Based on Asian and European data since then, NKE seems poised to disappoint for the second straight quarter.
Valuation: NKE trades on a 18 forward P/E, sports a 1.5% annual dividend yield, and has projected sales growth of 8% and earnings growth of 14% for next year’s consensus estimates. Its P/E is near the high end of its 5 year range, despite the fact that expected earnings and sales growth over the next year is near the low end:
5 year NKE P/E ratio chart courtesy of Bloomberg
Most interesting from a fundamental standpoint is that NKE’s gross margins (in the low 40s) are near 5 year lows as well. NKE is one of the few large American multinationals who is not operating near peak margins.
Technicals: NKE clearly broke its 3 year uptrend with its steep selloff after the June earnings report. NKE is down about 1% YTD in 2012, significantly underperforming the broader market.
The 5 year weekly chart shows the break below the long term trendline:
5 year NKE stock chart courtesy of Bloomberg
The stock tried to regain the trend on the recent rally. The $100 level is clear resistance, with support coming in around the June lows of $85 after earnings.
Volatility: NKE has weekly options with vol priced in the 80’s but the regular months are in the 20’s and 30’s with October 35 vol, and Nov 28 vol. Historically, vol across all months is pretty high, with IV above the average earnings cycle. It probably ticks a little higher in the next day. The actual vol in the stock is far lower than options are trading, that could change obviously on a big move down after earnings, but in general actual vol and implied vol tend to be in the mid to high 20’s over time. Although, following earnings they collapse, so expect Nov and out month vols to see the low 20’s following the report.
My View: NKE has been a weakling in a very strong year for stocks. There are many examples of stocks that reported weak Q2 results, but have since ridden the central bank wave higher no matter the fundamentals. NKE’s inability to participate in that rally throughout the year is a cause for serious concern. Dan mentioned the cheapness of October implied volatility in his Name That Trade post from almost 2 weeks ago. Since then, implied volatility has become more elevated, making front month bets less attractive on a risk/reward basis. I am likely to execute a new trade on NKE ahead of earnings tomorrow, but I plan on moving further out in expiries given the move in implied volatility into the earnings report.