Event: NKE reports fiscal Q2 earnings today after the close. The options market is implying about a 4.25% move, which is right in line with the 4 quarter avg of 4.25%, and slightly below the 8 quarter average of 5.75%
Sentiment: Wall Street analysts are somewhat bullish on the name, with 11 buys, 13 holds, and no sells, unchanged since last quarter’s earnings report.
Fundamentals: NKE gets only 45% of its revenues from North America, and international weakness especially hurt results in the last 2 quarters. The U.S. business has been the consistent breadwinner for the company, growing almost 20% yoy in the past 2 quarters. Recent monthly sales data actually showed some U.S. slowing but international stabilization.
One other major factor should be gross margin performance and guidance. Here is the 10 year chart of gross margins at NKE:
10 year NKE Gross Margin chart courtesy of Bloomberg
Gross margin was as low as 41% in 2003, and as high as 47% in 2009. It is now around 43.5%. NKE’s strong stock performance in the past decade has benefitted from improving and maintaining its margins. The stock has stagnated since mid-2011, and margin pressure has been one reason.
Valuation: NKE trades on a 18.5 forward P/E, sports a 1.5% annual dividend yield, and has projected sales growth of 7% and earnings growth of 15% for the next 2 years’ 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:
10 year NKE P/E ratio chart courtesy of Bloomberg
This valuation makes an increase in the stock price difficult without some strong earnings beats. That’s certainly possible, but a high bar has been set for earnings growth for 2013 and 2014.
Technicals: NKE clearly broke its 3 year uptrend with its steep selloff after the June earnings report. Since then the stock has been stock in a range between 90 and 100, shown by the 1 year chart:
1 year NKE stock chart courtesy of Bloomberg
The $100 level is clearly crucial from a psychological standpoint. We’ve seen supply there on several occasions in the past 6 months.
My View: My view on NKE is essentially the same as it was before last quarter’s report:
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.
One caveat, though – expectations for this quarter’s earnings ($1.00) are quite low. In contrast, the expectations for 2013 earnings is quite high. So a balance of current results vs. guidance could impact the stock’s reaction.