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Nike Inc (NKE) Looks to Put a Horrible 2016 to Rest

Kyle Woodley

Nike Inc (ticker: NKE) is adding more weight to the case for investing in the dregs of the Dow.

The venerable athletic apparel maker closed out 2016 with a roughly 19 percent loss -- the lion's share of a 25 percent bleed since late November 2015 -- to finish as the Dow Jones industrial average's worst stock of the year.

That itself was in line with the common happenstance of the Dow's best stock from one year underperforming the next; Nike stock shot more than 30 higher in 2015. It also made Nike a seemingly good bet going into 2017 -- MarketWatch's Mark Hulbert points out that investing in the Dow's worst stock from the previous year leads to massive outperformance in the year ahead.

[See: 7 Stocks That Soar in a Recession.]

So far in 2017, that routine is playing out once more. As Nike heads into its Tuesday evening earnings report, NKE stock is up 14 percent to more than double the Dow and place among the five best performing DJIA components for the year-to-date.

Now, investors are about to find out whether Nike had a good enough holiday season to not only back up its gains, but spark more momentum for the coming months.

The headline numbers: Here's what Wall Street expects heading into Nike's fiscal third-quarter earnings report, due after markets close on Tuesday:

-- Earnings of 53 cents per share, down 3.6 percent from the same quarter a year ago

-- Earnings whisper number of 55 cents per share.

-- Revenues of $8.47 billion, up 5.4 percent from the same quarter a year ago)

For the record, the question probably shouldn't be whether Nike will beat, but how much it will beat by. NKE hasn't missed a quarterly earnings mark in years.

There's not a lot of growth left. Nike is the market share leader in most major athletic apparel segments, though the numbers bounce around a lot depending on who's doing the surveying. For instance, U.S. running apparel (60 percent as of 2015), U.S. basketball sneakers (90 percent) or global sports footwear (50 percent). But a particularly telling figure is that according to Macquarie Group, a global financial services group, Nike's global share across athletic footwear, apparel and equipment is at 16 percent.

And Nike was No. 1.

However, while it would seem like that means the sky's the limit, with so much more market share to potentially gobble up, instead it shows how fragmented and myriad the competition is. No. 2 globally, for instance, is Adidas at just 10 percent, and the top five companies make up just 35 percent of the world's share.

In fact, competition is what prompted Cowen & Co.'s John Kernan to downgrade Nike back in early December. He believes the likes of Under Armour ( UA, UAA) and Adidas could continue to claw market share away from Nike, and pointed to a massive 11-percentage-point decline in brand preference by consumers.

Kernan also said "promotions in North America and international inventory appear elevated," which indeed were problems when Nike reported second-quarter earnings just a couple of weeks later.

[See: 10 Skills the Best Investors Have.]

Stifel, in an otherwise positive note, summarized the issue earlier this month:

"Our top-down view of the market suggests Nike growth objectives through 2020 depend on either maintained share in a market that sustains a low double digit growth rate and/or gains at the expense of others. Accordingly, focus remains on Nike relative to competition. We believe Nike will need to evolve to compete more effectively, and convincing evidence to make market growth and share resilience tangible is unlikely until [the first half of fiscal year 2018]."

Reasons for optimism. Still, NKE shares aren't clobbering the market in 2017 just because investors couldn't find a better way to spend their money.

For one, Nike's second-quarter earnings report in December was full of good news. Revenues and earnings beat the Street, with sales in Western Europe and Greater China surging by double digits.

Susquehanna Financial Group went full bull on a March note on Nike, too, with gems like "value has been enhanced" and "innovation is robust." Indeed, Nike's innovative edge looked razor-sharp when it ignored the expected outcry from some camps to unleash its "Pro Hijab" in response to not being able to wear their traditional scarf during athletic events. Susquehanna sees NKE shares hitting $64, or another 10 percent upside.

But perhaps Nike's ability to keep the pros guessing is best illustrated by the aforementioned note from Stifel, which sees the third-quarter report including preliminary 2018 fiscal year guidance that "supports prevailing expectations for high single-digit revenue growth and low-teens EPS growth." Stifel believes that will be "sufficient to support the stock at current levels but unlikely to take shares meaningfully higher." Stifel finished the note by slapping a $68 price target on Nike stock.

Somehow, 20 percent upside falls short of "meaningfully higher."

More Earnings in Focus

Micron Technology (MU), Thursday. Red-hot chip companies have been prone to violent pull-backs this year. Nvidia Corp. ( NVDA) is up 215 percent in the past year, but that includes a 10 percent-plus pullback since February. Advanced Micro Devices has shot 360 percent higher in 52 weeks, but it too is on a double-digit slide that started last month. Micron hasn't headed higher in a perfectly straight line, but for the most part, its 131 percent returns since March 2016 have gone by mostly unimpeded. That could change after the bell Thursday, depending on what its results look like compared to analyst estimates of $4.64 billion (an increase of 58.1 percent) on the top line, and 84 cents on the bottom line -- a flip from a year-ago loss of 5 cents.

FedEx Corp. (FDX), Tuesday. FedEx's numbers, due out Tuesday morning, won't be nearly as explosive as Micron's, but Wall Street is still looking for a robust 18.6 percent improvement in revenues to $15 billion. Meanwhile, earnings expectations are a bit more modest, at something robust. Analysts see revenues growing 18.6 percent to an even $15 billion, and more modest earnings growth of 4.3 percent to $2.62 per share. Analysts have been warming up to FedEx over the past couple months, with Wells Fargo expressing optimism about the TNT acquisition and e-commerce as it initiated FDX at "market perform," and Raymond James upgrading shares to "outperform," again on TNT hopes.

This Week's Earnings Calendar

Tuesday. Francesca's Holdings Corp. ( FRAN), General Mills ( GIS), Lennar Corp. ( LEN), Silver Wheaton Corp. ( SLW)

Wednesday. Winnebago Industries ( WGO), Cintas Corp. ( CTAS), PVH Corp. ( PVH)

Thursday, March 23. Accenture PLC ( ACN), ConAgra Brands ( CAG), GameStop Corp. ( GME), KB Home ( KBH), RH ( RH)

[See: 10 Important Investments Before Having a Baby.]

Friday, March 24. Finish Line ( FINL)



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