Event: NKE reports its fiscal Q4 earnings tomorrow after the close. The options market is implying about a 4% one day move, which is below the four-quarter average of about 3.25% but above the eight-quarter average of about 5.25%.
Sentiment: Wall Street analysts are somewhat positive on the stock, with 18 Buys, 13 Holds and no Sells, with an average 12-month price target of around $83. NKE is one of the few large cap stocks that is negative so far in 2014, down 5% year-to-date. The stock closed near an all-time high (which is $80.26 from Dec. 9th) on December 31st, but has traded in the red for much of the year. Short interest is negligible at 1% of the float.
Options Open Interest: Open interest is skewed towards calls over puts by a ratio of 1.65 to 1. Calls have been much more active over the past month, trading around 2.75x more than puts. Jun27th upside calls have been particularly active, with the Jun27th 77, 78, and 80 calls all with around 10k of open interest. The Jul19th 80 calls is the only other line on the board with around 10k of open interest.
Price Action/Technicals: NKE has been rangebound between $70 and $80 throughout 2014:[caption id="attachment_42148" align="alignnone" width="600"] NKE daily chart, 50 day moving average in pink, 200 day moving average in yellow, Courtesy of Bloomberg[/caption]
Both the 50 day and 200 day ma have flattened out around the midpoint of the range, around $75. The stock has generally held above its 200 day moving average throughout the action of the past 2 months, even with many slight breaks.
NKE’s rangebound action of the past 9 months could be viewed as healthy consolidation of the extensive long-term uptrend of the past 5 years:[caption id="attachment_42149" align="alignnone" width="600"] NKE weekly chart, 50 week ma in pink, 200 week ma in yellow, Courtesy of Bloomberg[/caption]
The stock has rarely traded below its 50 week ma during this period, and the uptrend from late 2012 to the end of 2013 was particularly strong. A break below $70 would put the longer-term uptrend in question, while a break out above $80 would be quite bullish.
Fundamentals: This is what I wrote in a CotD post on NKE two weeks ago:
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:
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.
Guidance and margins will be particularly important in tomorrow’s earnings report. While the bar for the current quarter is quite low, analysts have modeled in an average of 13% EPS growth over the following 4 quarters, while sales growth is expected to continue at around 9% annually. At a valuation of around 25x, NKE investors are likely expecting at least 10-15% earnings growth far into the future.
Volatility: 30 day implied volatility in NKE is at its lowest level ahead of an earnings event over the past 2 years:[caption id="attachment_42150" align="alignnone" width="600"] 30 day implied volatility in NKE, Courtesy of Bloomberg[/caption]
With the low volatility backdrop in the overall market, NKE implied vol is likely to fall down to near a 2 year low after the earnings event. The one exception to this scenario is if NKE breaks out of the $70-$80 range in the coming weeks, which is a low probability scenario.
Our View: Technically and fundamentally, NKE’s situation looks more neutral than favoring either direction. The stock is unlikely to break out of the $70-$80 range barring a major surprise on the earnings report. Low implied volatility suggests that most options traders don’t expect such a surprise, and neither do we. While we like the idea of a rangebound trade, low implied vol makes those structures less attractive. We will be sure to post if we pull the trigger on anything before tomorrow afternoon.