Nike Stock Isn’t the Best Idea for 2019, But It’s Still a Good Idea
Stocks kicked off December trading on a strong note thanks to the U.S. and China striking a ninety-day trade war truce which eased market concerns regarding the prospects of bigger tariffs in the new year. But, one stock that stood out from the pack on Monday was Nike (NYSE:NKE).
Nike stock is trading nearly 4% higher on a double dosage of good news. On one end, de-escalating trade tensions between the U.S. and China ease rising cost pressures for Nike and improve the company’s international growth prospects. On the other end, Citi came out and called Nike stock a “Best Idea” for 2019.
Overall, since bottoming out in late November, NKE stock is up an impressive 10% in just two weeks.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Is this rally over? Or does Nike stock have the energy to keep running higher?
I think the latter. At current levels, the valuation on NKE stock feels fair, implying that valuation upside is limited. But the company’s revenue and margin trends are steadily improving. This improvement should persist, and power healthy earnings growth for the foreseeable future. This healthy earnings growth, coupled with a fair valuation, should keep Nike stock on a wining path for the next several quarters.
As such, while Nike stock isn’t a best idea for 2019, it’s still a good idea, and it’s still worth owning at current levels.
Nike’s Growth Prospects Are Improving
The underlying growth narrative at Nike is rapidly improving, and this improvement is reason enough to bullish on the stock here and now.
From fiscal 2015 through fiscal 2018, Nike was characterized by slowing growth. Overall constant currency revenue growth slipped from 14% to 12% to 8% to 4% during that stretch, while North America revenue growth fell from 12% to 8% to 3% to -2%. The big culprit? Adidas (OTCMKTS:ADDY), who was leveraging a return to retro styles to steal market share from a complacent Nike.
But, the Adidas resurgence woke the Nike sleeping giant. It took a while for the huge Nike machine to get back into growth mode, but nonetheless, Nike finally got going earlier this year. Now, thanks to accelerated product innovation and a streamlined investment strategy, Nike is firing on all cylinders again.
Nike is stealing back lost market share from Adidas as Nike’s revenue growth rates are now improving while Adidas growth rates are slowing. The company is also importantly growing revenues in the North America business again, and doing so at the fastest clip since 2016. Overall revenue growth is also running at its highest rate since 2016. Meanwhile, gross margins are finally expanding again for the first time in several years, while the SG&A rate is falling back thanks to healthy revenue growth trends.
Overall, the Nike narrative is dramatically improving. These improvements are showing no signs of slowing, either. Foot Locker (NYSE:FL) just reported quarterly numbers that were much better than expected, and management said on the earnings call that Nike was a big driver of that success. Both domestic and global search interest trends for Nike remain favorable, while Nike’s mind-share as the number one clothing and footwear brand among U.S. teens is only growing. Plus, tariffs being pushed back delays a potential margin headwind for Nike, and should help EPS numbers in the near term.
Long story short, there’s a lot to like about Nike’s business momentum here and now. In it of itself, this business momentum constitutes enough reason to be bullish on this stock heading into 2019.
Valuation Is Fair
I was a big fan of Nike stock back in late November when this was a $70 stock. Now, up near $80, Nike stock still looks good, but not as good.
The valuation at current levels seems fair. In the big picture, Nike is a consistent mid to high single-digit revenue growth company supported by higher average transaction prices, broader global adoption of athleisure wear, and an unparalleled brand status in the athletic apparel space. Also, this is a company which, thanks to renewed growth, should be able to push margins back towards peak level over the next several years.
Under those reasonable assumptions that NKE maintains mid to high single revenue growth and slightly expands margins, a realistic fiscal 2024 EPS target for this company is $5. Throwing a historically average 25 forward multiple on that, you arrive at a fair fiscal 2023 price target for Nike stock of $125. Discounted back by 10% per year, that equates to a fiscal 2019 price target of roughly $85.
Thus, over the next several months, NKE stock has about 10% upside based on long-term growth fundamentals. That is good, but not great, upside potential.
Bottom Line on NKE Stock
At current levels, the valuation on Nike stock is fair, while the company’s underlying growth trends are exceptionally favorable. A fair valuation coupled with strong growth trends makes Nike stock a good, but not great, stock pick for 2019.
As of this writing, Luke Lango was long NKE and FL.
More From InvestorPlace
The post Nike Stock Isn’t the Best Idea for 2019, But It’s Still a Good Idea appeared first on InvestorPlace.
