Event: NKE reports its fiscal Q4 earnings today after the close. The options market is implying about a 5% move post-earnings, which is lower than the 4 qtr avg move of about 7%, and lower than the 8 qtr avg move of about 6.25%.
Sentiment: Wall Street analysts are fairly bullish on the stock with 14 Buys, 15 Holds and 0 Sells. The average 12 month price target is around $64.50. Options open interest is evenly split between calls and puts.
Fundamentals / Valuation: There is little doubt that NKE is expensive from a valuation perspective. It trades at a 25x P/E, with growth prospects of 15% per year for the next 2 years. That’s solid potential growth, no doubt, but the valuation leaves little room for error. NKE has had better 20%+ earnings growth in several years over the last decade, but the stock’s valuation on a P/E is at a 10 year high:[caption id="attachment_27597" align="alignnone" width="505"] 10 year chart of NKE Trailing 12 month P/E, Courtesy of Bloomberg[/caption]
Yes, the stock has had two straight earnings reports that were stronger than expected. It is one of the strongest consumer brands in the world. And though industrial businesses have been hurt by international exposure, international consumers have not cut back their spending, particularly on brand names.
But buying NKE stock at that valuation is a poor risk/reward proposition. Nothing more to say.
Price Action / Technicals: The 1 year chart of NKE shows a flattening out of a huge rally that took place over the past 6 months:[caption id="attachment_27585" align="alignnone" width="634"] 1 year daily chart of NKE, Courtesy of Bloomberg[/caption]
The last 2 earnings reports resulted in major upside gaps that were never filled. Today’s rally has brought the stock back up to the 50 day moving average around 62.75. The strength of the rally this year is shown by how far the stock remains above its 200 day moving average despite the stalling in the stock over the past 2 months. The 200 day moving average lies all the way down at 55.
In the short-term the level to watch on the upside is around $66, the all-time high. On the downside, the low on Monday was at 59.11, which was the stock’s lowest price since early April.
Volatility: Volatility in NKE has rallied to near 1 year highs ahead of earnings, mainly because the last move of 11% in NKE has causes traders to pay more for the earnings event this time around. Here is the 1 year chart of 30 day implied volatility (red) vs. 30 day realized volatility (blue):[caption id="attachment_27590" align="alignnone" width="671"] 1 year chart of 30 day IV (blue) vs. 30 day RV (red), Courtesy of LiveVolPro[/caption]
Post-earnings, 1 month implied vol is likely going to drop down to the 20 level.
My View: NKE’s valuation is simply too high for us to be interested on the long side in this name. It’s a solid business that has been executing well, so we don’t have much interest in fading it either. But given the elevated expectations and valuation, we see considerable downside risk with more limited upside reward.