MorningWord 6/27/14: Nike Fueled for Breakout? $NKE

by Dan June 27, 2014 9:29 am • Commentary

Last night NKE reported a fairly solid quarter, highlighted by slight beats to consensus on eps, sales, gross margins and futures orders (albeit against mildly lowered guidance in March that caused the stock to decline 5% from just above $79 to just below $75 the day following their fiscal Q3 on March 20th).  Interestingly, with the stock’s gains in the pre-market, the stock has gone from $75 on Tuesday to about $79 this morning.

In our quarterly preview on Wednesday we concluded:

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.

Aside from the mild metric beats, bulls will point to strong futures orders and the recovery in some geographies that have struggled of late (like China). My Fast Money friend, and co-portfolio manager of the Actions Alerts Plus product, Stephanie Link, who owns shares of NKE, had the following to say on the topic last night in a blog post:

Futures were strong across the board, with the exception of Japan. North America futures orders on a constant currency basis posted 11% growth, Western Europe up 22%, Central and Eastern Europe up 14% and emerging growth rose 9%. Japan was flat. China was a big positive callout, rising 6%, well ahead of the 3% guidance and the declines seen all of last year. Again, total futures orders improved 12%. Revenues were also impressive by geographic region. North America revenues rose 10% (vs. 9% consensus) with strength in all categories, and notable double-digit growth in basketball and football, Western Europe increased 18% and Central and Eastern Europe was up 12%.  China posted upside at 2% growth (vs. flat expectations), driven by a 6% rise in footwear. 


A solid quarter, much improved visibility and in-line guidance should be a relief to investors vs. last quarter. We trimmed today, locking in gains, but it remains a core holding with real upside from Europe, emerging markets and China driving higher revenues.

We have not traded NKE in a while.  Frankly, we have been of the mindset that the stock is a good buy in the low $70s and probably a decent sale closer to $80, and our last trade in the name was a bullish call spread purchase when the stock was $71.40 back in early February (here).  On Wednesday on Fast Money I took a guarded bear stance in a debate on the stock.  Here were my notes for the debate:

From: Dan Nathan
Sent: Wednesday, June 25, 2014 2:29 PM


1. Expectations: they are not particularly high, when the company reported fiscal Q3 results back in March they guided this qtr down, analysts now expect earnings to actually decline 1% year over year.  Company also guided down fiscal 2015 citing currency headwinds.

2. Valuation: company has a very premium brand, deserved of a premium valuation, but at 22.5x forward earnings expected to grow it is getting near a 10 year high on that metric

3. Price action / Techncials: stock is down 3% on the year, hard to find how quality multinationals that under-perform like NKE.  But the stock is locked in the middle of the range over the last 9 months, kind of in no mans land.

MY VIEW: I suspect the company beats lowered guidance and sees decent futures orders, but will take a beat and raise for the stock to break out above 80 and make a new all time high.  The options market implies about a 4% one day move which is shy to the 4 qtr avg of about 5%.  Stock at the moment in no mans land, and I think the risk reward for long entry in front of the qtr is not great. I would be a buyer in the low 70s on in line qtr and squishy guidance.

The one rub from where I am sitting was how the company achieved the lowest year over year eps gain in two years – share buybacks.  From last night’s earnings press release:

During the fourth quarter, NIKE, Inc. repurchased a total of 12.3 million shares for approximately $912 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of fiscal 2014, a total of 51.9 million shares had been repurchased under this program for approximately $3.4 billion, at an average cost of $65.83 per share.

NKE has been aggressively buying back shares, and apparently stepping up their purchasing.  That can only be for one of two reasons, because they think their stock is a great buy at current levels, or that they are doing so to make their own earnings guidance.  Either way you look at it, the earnings growth (or lack there of) has little to do at the moment with their core business.  Despite all of that buying, NKE stock is still only unchanged in 2014.

So I’ll reiterate, until we see an acceleration in organic earnings growth, the stock in the high $70s remains expensive at 22.5x current fiscal 2015 estimates, which were not raised on last night’s call. Obviously the improvement in EM, and the strong futures are encouraging, but currency headwinds and higher input costs may offset some of this improvement.

Is the stock setting up for an epic breakout above the previous highs? Maybe, but I am not sure that last night’s results are the proper catalyst. I would now move up my low $70s entry point on the long side to the mid $70s, as I would only be interested to play for a technical breakout after a greater period of consolidation.