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Should You Buy Nike (NKE) Stock At New All-Time High?

Benjamin Rains
People's United Financial (PBCT) Q2 results reflect higher revenues, lower provisions and well controlled expenses. Further, loan growth continued.

Shares of Nike NKE soared over 12% to hit a new all-time high on Friday morning after the company posted better-than-expected Q4 results Thursday. Yet, more than the top and bottom line beats, investors seem ecstatic that the sportswear giant posted North American revenue growth after nearly a year of declining sales. So, amid this Nike fervor, let’s assess the stock and see if investors might want to consider buying NKE at its new high.

Q4 Highlights

Nike’s Friday climb comes after the company saw its stock price surge nearly 10% after-hours Thursday. The company posted adjusted earnings of $0.69 per share, which topped the Zacks Consensus Estimate of $0.64 per share. Meanwhile, Nike beat our quarterly revenues estimate, with Q4 sales up 13% from the year-ago period to $9.79 billion.

The Beaverton, Oregon-based company also saw its North American sales pop 3% to hit $3.88 billion, after three straight quarters of declines. This is hugely important since Nike’s domestic market accounts for roughly 40% of its total revenues.

Investors will also be pleased to see that Nike has continued its double-digit international growth, with Greater China sales up 35% to $1.47 billion—Jordan Brand soared nearly 50%. Nike’s revenues climbed by 24% in Europe, Middle East, and Africa to $2.47 billion, while Asia Pacific and Latin America sales popped 12% to $1.44 billion.

Nike-brand footwear sales, by far its most important business, saw its quarterly revenues hit $6.14 billion, representing a 12% climb from the prior-year period. 

The company also announced a new four-year, $15 billion share repurchase plan of Nike’s Class B Common Stock that is set to begin after Nike’s current $12 billion program is completed at some point during fiscal 2019. This should be good news for investors since big buybacks can signal that the company’s executives and board believe the stock to be undervalued—and certainly not expensive. The company also upped its quarterly dividend.

Digital Dash

Now that we have covered some of Nike’s overall fourth-quarter highlights, let’s take a closer look at why investors should really be pleased: digital sales growth. Last June, Nike announced its new digital and e-commerce push, known as the Consumer Direct Offense.

Nike’s Consumer Direct Offense includes digital initiatives such as the SNKRS app and its NikePlus memberships, as well as vital partnerships with Amazon AMZN and Chinese e-commerce power JD.Com JD. Nike even noted that it has benefited from its use of Facebook’s FB Messenger app.

Nike Direct sales climbed 15% to $10.4 billion for the year, compared to just 4% growth in its traditional wholesale business. The company said that its digital sales soared by 41% in Q4.

Nike noted on its earnings call that Nike Direct drove over 90% of its growth for the full-year. “First, we said that new innovation platforms will drive over 50% of our incremental growth over the next five years,” CFO Andy Campion said on the call. “Digital is proving to be as transformative as we expected, and potentially even more transformative.”

Industry Overview

Moving on, Nike currently faces increased competition from rival Adidas ADDYY as well as Lululemon LULU and other companies, with the sportswear market shifting further toward athleisure. Notably, Under Armour UAA has failed to gain much traction in this category.

Luckily for investors, Nike has been very successful in its off the court, non-performance sector. In fact, its Sportswear unit—what it calls its non-running, non-basketball, non-Jordan, non-training offerings—was the company’s largest at roughly $10.02 billion in full-year revenues. Nike Sportswear also expanded 8% and the company seemed very pleased with its outlook.

Valuation/ Growth Outlook

Now that we have covered Nike’s Q4 results and touched on its key categories, let’s take a quick look at NKE’s valuation picture and its growth outlook. Coming into Friday, Nike stock was trading at 26.7X forward 12-month Zacks Consensus EPS estimates, which marked a premium compared to its industry’s 20.7X.

Nike stock has traded as high as 28.5X and as low as 21X over the last year, with a one-year median of 25.5X. Therefore, Nike is resting just below its year-long high and above its peers. But it is also worth noting that Nike has traded at a premium compared to its industry over the last five years and is currently trading below its three-year high of 29.6X.

Looking ahead to fiscal 2019, Nike’s revenues are projected to climb by 6% to $38.61 billion, based on our current Zacks Consensus Estimates. Meanwhile, Nike’s full-year earnings are projected to pop by 9.5%. The following year looks even better, with revenues projected to pop 7.5% and earnings expected to climb by 15.5%.

Bottom Line

Nike is currently a Zacks Rank #3 (Hold) and sports an “A” grade for both Growth and Momentum in our Style Scores system.

Nike sees its future centered around digital and direct to consumer sales, which is not only good news since that is the direction the industry is trending, but because it should lead to higher margins. The company also looks poised to continue to expand internationally, including massive growth in the world’s second-largest economy, while it begins to reestablish itself in North America. Therefore, Nike stock might be worth buying, even at its new high.

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