$NKE Fiscal Q4 Earnings Preview

by Dan June 27, 2016 3:11 pm • Commentary• Trade Ideas

Event: Nike (NKE) reports their fiscal Q4 results tomorrow after the close. The options market is implying about a 5.5% one day post earnings move in either direction.  With the stock just below $52 the July 1st weekly 52 straddle (the call premium + the put premium) is offered at about $2.90, if you bought that you would need a move above $54.90 or below $49.10 to make just break-even on Friday’s close.  The average one day earnings move over the last 4 qtrs has been about 4.85%, with the 10 year average about the same.

Price Action / Technicals:  NKE is down 17% ytd, and down 24% since making a new all time high on December 23rd, the morning after reporting better than expected fiscal Q2 results. The stock has been in a well defined downtrend since with a series of lower lows, with just one counter-trend new high that occurred in the run to the company’s Q3 earnings in late March that disappointed. No matter how you draw the downtrend channel, the stock has the look and feel of one with a 4 handle in the not so distant future:

[caption id="attachment_64645" align="aligncenter" width="600"]NKE 1yr chart from Bloomberg NKE 1yr chart from Bloomberg[/caption]

Speaking of a 4 handle, the long term uptrend in NKE happens to touch its August 24th flash-crash low of about $47, which seems like a fairly healthy near term target.  The break of the long term uptrend could now serve as upside resistance:

[caption id="attachment_64646" align="aligncenter" width="600"]NKE 5yr chart from Bloomberg NKE 5yr chart from Bloomberg[/caption]

I’ll add one more point on the chart, the all time high that came on December 23rd was also the morning the company split their stock 2 for 1, which came a month after the announcement that was coupled with a 4 year, $12 billion share buyback announcement. The fact that the stock rallied into such and event, and topped out on the event is fairly typical of the market we have been in.

My View into the print: That premium valuation that shares of NKE has traded at vs most apparel peers, and the market is quickly dissipating in 2016.  Yeah the stock still trades at 21x expected fiscal 2017 eps that consensus has growing at 14% with expected sales growth of 9%, but the stock, along with other former consumer leaders like Disney (DIS) and Starbucks (SBUX) that traded at premiums are being scrutinized by investors and severely under-performing the broad market.

Expectations are clearly low heading into earnings, despite Wall Street analysts still very bullish with 25 Buy ratings, 9 Holds and no Sell ratings with an average 12 month price target of about $71, or 38% higher than current levels.

NKE gets about 60% of their sales from outside the U.S. and much of their future growth from emerging markets like China.  When NKE reported in March they highlighted the headwinds of the strong dollar, as futures orders were up 12% in Q3, up 17% on a constant currency basis.  Analysts were generally very positive on overseas growth heading out of Q3, per Barron’s:

growth across the board looks set to continue, with double-digit increases (excluding currency) in future orders in every geographic region: China led the pack, with a 36% increase in future orders, followed by Japan’s 24% increase, and emerging markets as a whole were up 14% on a constant currency basis. Western Europe and Central Europe saw orders climb 23% and 14%, respectively, and North American orders are up 10%

In the post Brexit world, it will be interesting on tomorrow’s call to see how NKE management addresses what seems to an increasingly volatile global currency backdrop with a very fragile global economy in tow. They will be one of the first multi-nationals to get quizzed on how they’re going to handle economic disruption in Europe.

Oh and if you are like me, you have one tv on CNBC and the other on the Euro football championship and the Copa Americana cup which is all the lead up to the Olympics in August in Rio.  These events should all be a healthy tailwind for NKE, so if guidance is deemed conservative, there could be some big problems for U.S. multi-nationals.

Stay tuned.