$NKE Fiscal Q1 Earnings Preview

by Enis September 26, 2013 10:33 am • Commentary

Event:  NKE reports its fiscal Q1 earnings tonight after the close.  The options market is implying about a 4.5% one day move, which is below both the 4 qtr and 8 qtr averages of about 5.25%.

Sentiment:  Wall Street analysts are generally positive on the stock, with 15 Buys, 15 Holds with an average 12 month price target of around $70.  Short interest is around % of float which is unchanged over the past 6 months.

Options Open Interest:  Open interest is actually skewed towards puts, with about 80k calls outstanding and 100k puts. between calls and puts.  The bulk of the open interest is in Jan14, though the Sept 63.5 put has more than 5k of open interest.  There is a limited amount of open interest above the 70 strike given the stock’s rapid advance this year.  

Price Action / Technicals:  NKE has been making consistent higher highs and higher lows for the past 2 years.  The stock broke out to a new all-time high early in 2013 (above the 2012 high marked in red):

[caption id="attachment_30630" align="alignnone" width="600"]NKE weekly, Courtesy of Bloomberg NKE weekly, Courtesy of Bloomberg[/caption]

The 57.5-60 area is serious long-term support.  But in the short-term, the stock’s breakout in September above the $67 level is the notable occurrence:

[caption id="attachment_30631" align="alignnone" width="600"]NKE daily, Courtesy of Bloomberg NKE daily, Courtesy of Bloomberg[/caption]

A continued break higher after earnings would have no resistance as NKE would make another new all-time high.  But a move back below $67 would represent a false breakout, and imply a much more difficult time for NKE’s stock for the rest of 2013.

Fundamentals:  Back in June when NKE reported their fiscal Q4, the company issued better than expected earnings on strong U.S. sales that also showed signs of recovery in some overseas markets like China where margins were better than expected.   Despite strong near term results, the company lowered fiscal 2014 earnings guidance to “low double digit increase” vs the prior guidance of a “mid teens” rise.  Bulls on the company walked away from the qtr suggesting that the company was executing well in a difficult environment, and the company was smart to take the opportunity to lower expectations in front of a period where currency could provide headwinds as they get about 60% of their sales from overseas, and much of their expected future growth.

Analysts remain fairly guarded on the name as it relates to their ratings with 15 Buys and 15 Holds as I suspect the stock trading at 23x this years expected earnings growth of ~12%, maybe getting a tad rich with the stock trading at 10 year highs on a trailing basis.

[caption id="attachment_30696" align="aligncenter" width="589"]NKE 10 yr PE from Bloomberg NKE 10 yr PE from Bloomberg[/caption]

Volatility Snapshot:   30 Day implied vol has ramped up into the event and is at similar levels to past few earnings cycles.

[caption id="attachment_30694" align="aligncenter" width="551"]Screen Shot 2013-09-26 at 7.58.21 AM from LiveVol Pro[/caption]

October vol is around 32, and November around 26. Look for those to be around 20 immediately following the event with high teens possible afterwards.

Our View:  It is easy to see many catalysts for the stock looking out to the back half of this fiscal year leading into the World Cup in the spring 2014, but that is a long ways away for a stock that is trading at all time highs with a valuation that could make the stock priced for perfection.  While the initial reaction to the Q4 results was profit taking the stock quickly regained its footing and within a month made a new all time high and now sits about 13% above the late June levels.  I think it is safe to say that good news is adequately reflected at current levels, but a second straight downgrade to outlook could cause a retest of the recent breakout level btwn 65 and 66 which is also corresponds with the 50 day moving average (or just about).

Stay Tuned we will post any trades that we find compelling into the print.