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NKE: What to Look for in Nike’s Earnings Report on Thursday

NKE: What to Look for in Nike’s Earnings Report on Thursday

  • Nike is expected to release its latest quarterly earnings on 22nd of March after market close.
  • Consensus EPS forecast for the quarter is $0.52, reported EPS for the same quarter last year was $0.68
  • Nike has met EPS expectation for the past 22 quarters.

This article is written by Jim (Jiecheng) Huang for Investments Revolution

Introduction

Nike’s (NKE) will release its earnings report for the fiscal quarter ending Feb 2018. Today, we will discuss what to look for in the earnings report, the outlook for the future and provide a valuation model based on current estimates, we will provide a comparison to results after the announcement.

The footwear market has been growing tremendously over the past few years. Nike’s revenue from the footwear segment has been growing at a year-over-year rate of nearly 10%. Some of the key drivers are the demand from millennials and the strategic business approach of limited supply by companies such as Nike (Jordan Brand) and Adidas.

(Source: Statista)

What to look for

According to consensus estimates, this is what we will be expecting in terms of sales and earnings from Nike’s Q3 earnings from Thursday.

Q3 2017 Estimates Average Low High
EPS $0.52 $0.47 $0.55
Revenue $8.83B $8.75B $8.87B
Q4 2017 Estimates Average Low High
EPS $0.71 $0.61 $0.81
Revenue $9.35B $9.16B $9.65B

Past EPS Surprises

For the past 22 quarters, we’ve seen positive EPS surprise from Nike. Given the fact that estimates of all key metrics are relatively conservative and an overall uptake in the footwear industry, we expect Nike to report a positive EPS surprise.

MAR 2016 JUN 2016 SEP 2016 DEC 2016 MAR 2017 JUN 2017 SEP 2017 DEC 2017
EPS surprise (%) 14.58% 2.08% 30.36% 16.28% 30.77% 22.45% 18.75% 17.95%

(Source: zacks.com)

With our current EPS estimates of $0.52 and $0.71 for Q3 and Q4. EPS for the fiscal year is estimated to be roughly $2.26. This is a 9.96% decrease from the $2.51 a year ago.

The growth of Nike is one of the important elements in the valuation of the company. Hence, we will conduct a reverse DCF analysis by using a two-stage model based on these estimates to calculate a required growth rate for the next 5 years.

Brand name

The swoosh from Nike is one of the most recognizable logos around the globe. According to Forbes, Nike is the 16th most valuable brand in the world with a brand value of $29.6 billion. This is an 8% increase from 2016. In comparison, Adidas is the 75th most valuable brand and their brand value is worth $7.9 billion, up 14% from 2016. They are the only two apparel brands that made it into the top 100.

A recent survey done by Piper Jaffray companies, examined the spending trends and brand preferences amongst 6,100 teens across 44 U.S. states. Results showed that Nike is one the major brands that experienced the largest decline within the apparel industry. The survey also suggested that teens are shifting to streetwear brand, such as Vans and Supreme. This could potentially become a problem for Nike if they are unable to attract the younger customer with their more fashionable image. However, Nike still holds the spot for top clothing brand at 23% vote and top footwear brand at 46% vote. While Adidas received 4% and 11% respectively.

Profitability

Nike has proven to provide consistent profitability at its size. With a ROE of 33%, ROA of 16% and ROC of 26%. Both ROE and ROA are well above the luxury goods industry averages of 11.25% and 6.7%, respectively. While ROC is slightly lower than their own ROC three years ago of 27.4%

(Source: Simplywall.st)

In comparison to other footwear companies in North America, Nike has a much better performance in all three metrics.

ROE ROA ROC
Nike (NKE) 33% 13% 26%
Adidas (ADIDAS) 21% 10% 25%
Under Armour (UA) -2% 0% 4%

(Source: Simplywall.st)

Valuation

In order to compare the valuation of Nike and its competitors, we’ve used a multiple analysis approach. By using EV/EBITDA, we can strip out differences in capital structure and difference in D&A.

PE (TTM) PB (TTM) EV/EBIT (TTM) EV/EBITDA (TTM) EV/Sales (TTM)
Nike 28.53 9.1 23.84 20.45 3.04
Adidas 35.94 6.1 18.28 14.88 1.80
Under Armour 90.09 3.55 239.83 35.73 1.47

(Source: Gurufocus)

Nike proves to provide better value in comparison to Adidas and Under Armour under our multiple analysis. To provide a better estimate of whether Nike is currently trading at a discount, we have constructed a DCF analysis by using a two-stage model.

DCF Parameters
EPS $2.51
Growth rate (Next 5 years) 9.91%
Discount rate 8%
Terminal growth rate 4%
Years of terminal growth 15 Years

Tangible book value: $6.98

Growth Value: $13.2

Terminal Value: $30.65

Fair value: $50.83

By using the above estimates, we arrive at a fair value of $50.83. This includes a tangible book value of $6.98, a growth value of $13.2 and a terminal value of $30.65.

Overall, our DCF model suggests Nike is trading at a premium of roughly 30%. Based on our DCF model Nike requires a growth rate of at least 17.34% for the next 5 years to meet a fair valuation of its current stock price of roughly $65.

Nike’s Growth Growth Rate %

(1 Years)

Growth Rate %

(5 Years)

Growth Rate %

(10 Years)

Revenue Growth Rate 6.1% 10.4% 9.9%
EBITDA Growth Rate 2% 12.3% 11.5%
EPS without NRI Growth Rate 1.8% 16.5% 12.8%
Free Cash Flow Growth Rate -1.6% 12.4% 8.3%
Book Value Growth Rate -2.7% 6.2% 7.9%

As shown by the Nike’s growth rate in different financials, an expected EPS growth of 17.34% growth looks extended at this moment.

Conclusion:

With Nike’s earnings report on Thursday, we expect a small positive EPS surprise and other financials to be in line with expectations.

The footwear industry has recovered from last year’s set back and is pushing to an all-time high. Being one of the industry leaders, Nike is performing tremendously well, trading at nearly $70 in Feb. Despite our valuation model suggesting Nike be trading at a premium of nearly 30%, it is still providing better value than many industry competitors, we don’t anticipate a correction anytime soon, so we recommend a HOLD for now and investors can consider decreasing their position at $72 per share.

As always, thank you for reading. If you wish to follow our future articles, just subscribe to our newsletters. If you are interested in our company, visit our website

(www.investmentsrevolution.com).



Categories: Featured, International Stocks & Other

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2 replies

  1. Nice article Jim.

  2. Hi Jim, interesting overview. Do you have any comments now that earnings have been released?
    And on a side note, what are your thoughts on Foot Locker and how NIke may offer more value as an investment case?

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