After Mixed Earnings, Is Nike Stock A Buy, Hold, Or Sell?

Nike (NKE - Analyst Report) shares are down about 4.3% since it reported mixed earnings on March 22. The premier athletic brand posted earnings of $0.55 per share, beating our EPS consensus of $0.48. However, the company missed on our revenues consensus of $8.2 billion, posting sales of just $8.03 billion for the quarter.

Results like these could give investors mixed signals as to whether they should be buying or selling shares right now. The company’s stock has been rebounding today, but so has the broader market.

Nike has a lot of strengths, but there are also a few glaring weaknesses for the company which could impact its share price in the short term. Let’s take a look at the most important ones—and what investors need to know about NKE stock—below:  

Strengths

NKE has the potential to cushion your portfolio from the market’s volatility, as it has a beta of just 0.61. It’s also worth noting that the company currently doles out a 1% dividend yield. 

Nike’s cash dividend has grown by 52% since the beginning of 2013.With this, I see some potential in Nike to become an attractive income stock over time. If you buy the stock now, and the cash distributed to investors continues to increase over time, Nike shareholders could receive a nice dividend yield over the long run.

There were some numbers from Nike’s recent earnings release which point out growth in demand for its products. The athletic retailer saw growth in its foreign presence, with China sales growing by 23% over the last quarter; earnings from Japan also grew by over 60% in the third quarter. These numbers were lead by growth in footwear sales across both of these countries. It should be noted that future orders for Nike’s next quarter surpassed investor expectations, with 17% futures growth after excluding currency changes.

Nike’s got some great fundamental growth metrics backing it up. The company’s EPS is projected to grow by 15.68% this year. The company also has a net margin of 11.84%, which is ahead of the industry’s average net margin of 5.63%.NKE is not too leveraged either, as the company’s debt to capital is just 14.27%.

Weaknesses

Nike’s weaknesses aren’t numerous, but they give investors good reason to hesitate on buying the stock. Nike is a global brand, and its business will be exposed to risks associated with currency fluctuation. Throughout 2015 and the start of this year, there has been a significant amount of FX volatility.Hopefully, the company can avoid getting caught up in currency headwinds. 

NKE’s valuation is pretty lofty, and it is currently trading at a forward PE of 28.81. This is nearly twice as high as the industry’s average PE of 14.56.This pricing multiple suggests that Nike’s stock is not trading at a bargain.  

Something else which backs up the notion that Nike is overpriced is its recent revenue miss. Nike’s PEG is 2.02, lagging behind the industry’s average PEG of 1.12. This suggests that Nike’s fellow peers are trading at a more reasonable price relative to earnings growth expectations.      

Bottom Line

Nike is a Zacks Rank #3 (Hold). The corporation’s high profit margins and international growth make Nike an exciting company. However, the current valuation is pretty expensive, and I’d argue that the price already reflects the high expectations investors have for Nike in the long run. The sales miss definitely makes me even more hesitant to recommend Nike in the short term, especially since this is the second time in a row that the company has missed sales expectations.

I love the company, and I love its products. Nike has done a great job of beating earnings expectations, and that’s why I can’t recommend selling the stock.

Right now, there are some glaring holes in the market, such as an excess supply of oil along with high production levels for the commodity. A struggling Chinese economy also adds to global market concerns. As more questions pop up surrounding these issues and their impact on the health of the global economy, the market will see continued volatility. 

Nike’s stock could go down with the market, and this would create an attractive opportunity to buy shares. If the valuations start to look more attractive, then I’d support a bullish opinion on Nike shares. That being said, as long as the PE stays this inflated and meeting sale expectations are issues to consider, I’d avoid going in on NKE stock over the short term.