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Is Nike Inc (NKE) Stock a Buy or Short Ahead of Earnings?

Bret Kenwell

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Nike Inc (NYSE:NKE) is set to report earnings on Thursday after the close. Investors are seemingly torn whether they should be long or short the athletic apparel maker heading into the results. For those that can look past some of the near-term headwinds, they could justify a long position in NKE stock.

Source: Kristian Olsen Via Unsplash

Retail has been under fire. There’ve been bankruptcies left and right and all we ever hear about is Amazon.com, Inc. (NASDAQ:AMZN). Indeed, AMZN has been leading the e-commerce crusade to disrupt all things retail. Investors could make a bear case for Nike on this front, but it’s not as bad as it seems.

They All Want Nike

For starters, Nike is a brand — a mega brand at that. It’s not a pure retailer like Macy’s Inc (NYSE:M) or even Foot Locker, Inc. (NYSE:FL). In the end, Nike is the product that consumers want and that won’t change due to changing shopping habits. Put another way, whether consumers are buying in-store or online won’t matter. Regardless of where it comes from, they’ll still want Nike.

Then there’s the possibility that Nike taps Amazon as one of its vendors. The news came earlier this month when reports began circulating from Goldman Sachs. If this ends up being true, it should be a growth jolt for NKE stock (as well as a positive for Amazon, too).

Anyone who’s questioning this move, just consider the long-term implications. Every six months, Piper Jaffray does a survey among teens. Nike beat out companies like American Eagle Outfitters (NYSE:AEO) and Forever 21 for the top clothing brand spot. Additionally, it easily took the top footwear spot as well. While it came in at No. 2 for top websites to shop, Amazon is head-and-shoulders above its competition in this survey.

But pairing the top website with the top company for clothing and footwear? That would be great news for NKE stock long-term.

Futures Orders Not As Important

Inevitably, investors will want to focus on Nike’s futures orders. Simply, futures orders measure sales from retailers some six months out into the future. In prior years, this metric was an important outlook into demand.

Those numbers would carry more weight if Nike didn’t have such a formidable direct-to-consumer (DTC) outlet. But because NKE is doing well in DTC, its futures orders are less important. Whether investors react that way remains to be seen, though.

In the end, futures orders have had less and less correlation with revenues, and that should be all the proof investors need.

China, Western Europe Demand

North American revenues still contributes the most to NKE and its top line, but China and Western Europe have been picking up the slack.

Last quarter, China revenues grew 18% year-over-year (ex-currency) to exceed $1 billion. Western Europe’s $1.49 billion was 11% ahead of last year’s results.

Investors should look for these two regions to drive growth again. In fact, last quarter, all other regions beat out North America. If NA can regain some momentum, shares should rally. If not, it could trip up NKE stock.

Trading Nike Stock

NKE stock chart

Click to Enlarge Source: Stockcharts.com

When it comes to NKE stock, we can see that it’s struggling to gain bullish momentum. While the black line has been support in recent months, the orange line closer to $48 has been more significant over the years.

A pullback to this level would be very welcome and, in my mind, represent a terrific long-term buying opportunity. Many investors would love to buy on a ~$5 per share decline, a fall of 7% to 8%. But will they get the chance? This future blue-chip stock is already down 20% from the all-time highs it made in late 2015.

The downside to Nike stock is that analysts only expect ~6% sales growth this year and next. While 11.6% EPS growth in 2017 is attractive, 3% in 2018 certainly is not.

Nike will need to grow earnings more in 2018 if it wants to see its stock regain and continue any sort of bullish momentum. Although NKE stock is at its lowest price-to-earnings ratio since 2013, some investors will still avoid it at 22x.

Here’s the bottom line: Nike certainly has some issues with the changing retail landscape. NKE stock may stumble when it reports earnings. If it does, consider buying. This is a powerful, desirable brand that consumers will continue to buy around the world. Even though there will be some headaches in the short-term, Nike is a lifetime company and a great stock to own for decades to come.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter at @BretKenwell. As of this writing, Bret Kenwell had a long position in NKE.

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