Today’s sell-off in Nike is a great example of the volatililty we should continue to see in the name for the next two months. The cards are stacked against it near-term, which is a gift for someone who wants to respect this thing we call earnings power.
From a trading perspective, NKE is bearish TRADE and TREND on our models. We rarely make ‘the sentiment trade’ on Nike, and we’re not going to start today. As such, until either a) NKE’s volatility ebbs, b) eight weeks’ time passes, or c) it’s price corrects, we’d rather be long the quality growth in UA, which is bullish TRADE and TREND – the opposite of where Nike is sitting.
There’s a very real mismatch with why we think the consensus owns Nike, versus why it SHOULD own Nike. The consensus view around Nike has been focused around near-term earnings upside and business momentum around key events and initiatives.
- Launch of the NFL deal. But that’s passed. NKE still reaps the benefits – and at an accelerating rate. But the initial splash has come and gone.
- Momentum in the North American business. Last quarter was 22% futures growth – the equivalent of adding an UnderArmour, and having $300mm left over. We can’t imagine that anyone thinks this is sustainable. But still, the rate is going down, not up.
- European Football Championships: Americans deny its existence, but this is bigger to Europeans than the Super Bowl and World Series combined. The event is halfway through.
- Launch of FlyKnit: Great new product, platform and manufacturing technology for Nike. It hits stores in full within a month. That’s great, but too many people are asking us about it. We don’t like when people get too pumped on a single initiative. Over 2-3 years, it definitely matters. But no single product can make or break this company.
- ‘The Olympic Trade’. We never could justify the rationale behind it. But it exists. No one is buying the stock now based on the event, but unfortunately those that are simply there to rent the stock rather than own the company will need to exit.
We still think that the REAL call is that Nike is going to ‘three-peat’. It’s having a great FY12. That will happen again in FY13, and again in FY14. We think it’s largely top line driven, but we’ll also see a meaningful recovery in Gross Margins due to growth in consumer direct, better pricing power, lower product costs, and fewer close outs due to a more efficient manufacturing process.
If we could craft this perfectly, it would be for long investors to wait for the ‘freak out’ event sometime over the next 8 weeks. If it doesn’t happen, then it’s probably because the company is giving the Street ammo to take up numbers in the outer years. In that event, we’d be comfortable getting in late – even at or above the current price – as the stock is trading today at less than 13x our May14 estimate. If our $8.00 number is correct, then we’ll be looking at a CAGR of about 20%. What kind of multiple do you put on that kind of growth for a quality global growth story like Nike with 25%+ return on capital? Let’s say it’s a slight discount to its PEG. Maybe 18x? $144 Stock.