Chart of the Day – $NKE: Two Feet, One Cup

by Enis June 11, 2014 11:57 am • Commentary

The World Cup starts tomorrow, and lasts until mid-July.  The one month sporting celebration features Nike as one of the main sponsors.  It’s a big deal for Nike for two reasons.  First, if the World Cup garners extraordinary attention this year, the Nike brand will obviously be one of the main beneficiaries.  Second, soccer-related sales actually made up nearly 10% of NKE’s total revenues in 2013, and are expected to surpass 10% in 2014 because of the World Cup.

BusinessWeek broke down the Nike-Adidas competition in a May 15th article:

Nike is now the largest sportswear company in the world, with $25 billion in revenue and a 17 percent market share. The second-largest, Germany-based Adidas, has $20 billion in revenue and 12 percent of the market. These share numbers soar for soccer gear, where together the two comprise 70 percent of the market. According to FIFA, the organization that governs international soccer, 300 million people play the game and a billion watch it.

Nike says it brought in $1.9 billion in soccer revenue in 2013. Adidas declined to share its number, but according to Peter Rohlmann, a sports marketing consultant based in Rheine, last year the company had $2.4 billion in soccer revenue.

Nike has done an admirable job in catching up to Adidas in soccer over the past 20 years.  Nike’s relentless pursuit of the top spot in every sport has helped it become the largest sportwear company in the world, by a long shot, at a market cap of $65 billion.

However, even with the World Cup this summer, NKE shares have been a major laggard in 2014, down 4.5% vs. the S&P 500 index up 5.5%.  The stock has run into selling near $80 prior to the last 2 earnings reports, in December and March:

NKE daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
NKE daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

NKE reports earnings again in late June, but this time around, the stock is trading around the crucial $75 pivot level, marked in red.  NKE has generally held its 200 day moving average over the past few months, though a convincing break back down to $70 support would give the NKE chart a more broken look.

The bar for the earnings report in a couple of weeks is relatively low, with analysts modeling in a -1% year-over-year EPS number, though on 10% sales growth.  At a P/E of 25x with earnings growth of 15% expected, NKE is on the high end of its historical valuation range:

NKE P/E ratio over past 10 years, Courtesy of Bloomberg
NKE P/E ratio over past 10 years, Courtesy of Bloomberg

That elevated valuation is likely the main reason for the stock’s pause over the past 6 months.  At this juncture, the $70 to $80 range seems likely to persist given the positive news backdrop with the World Cup, but an elevated valuation and a negative year-to-date performance in the stock.  We might look at a trade closer to the earnings date.