Takeaway: Some great aspects of this print. But we need higher EPS growth than 12% to justify multiple expansion. We can’t get there, yet.
Conclusion: We said earlier this week that we’re no more or less excited about owning Nike based on the 4Q print. That statement holds true after the company’s results. Yes, Nike beat by $0.03. That’s what great companies do – they consistently beat expectations. And there is no question in our mind that Nike is one of the greatest consumer companies in the world. That’s more clear today than ever before. But that doesn’t mean it has to be one of the greatest consumer stocks. While it beat the quarter, cash flow contracted and NKE grew EPS by only 3% on 11% revenue growth. Not a great quality quarter. Furthermore, we’re likely to see sales decelerate sequentially throughout the upcoming fiscal year, with EPS growth being fueled largely by World Cup spending simply not recurring. That’s not terrible by any stretch. After all, Nike is still in a more envious financial and operational position than most consumer companies. But at a 23x p/e, this stock is probably not going to go up due to multiple expansion. It needs outsized earnings growth. We’re currently looking at 11-12% growth for each of the next two years. If our numbers are right, then we can’t make the bet that the stock heads higher by anything more than the rate of earnings growth. But if 20% earnings growth becomes a reality, then we could argue a 25x p/e on a $3.60 EPS number and then we flirt with a $90 stock price. We don’t have the conviction top make that call today. We’re not changing any of our operating estimates, and are actually taking EPS down by about a nickel per year due to a higher tax rate. Financials are in table below.
Here are a few puts and takes on the results, as we see them.
HERE'S OUR PRE-Q NOTE FROM EARLIER IN THE WEEK
NKE – Consider the World Cup Biorhythm
Takeaway: 23x p/e is a tough risk/reward for a company that can barely grow EPS when the brand is hotter than ever.
We’re no more or less excited about owning Nike into the 4Q print to be reported after the close on Thursday. A few thoughts…
We’re not averse to owning Nike for someone who has an extremely long duration. But there’s no way we can justify putting money to work here for a company that is barely growing earnings when the brand is hotter than ever. With the stock at 23x next year’s earnings, we simply think that there’s much better risk/reward elsewhere.
Takeaway: 54% voted LOWER, 46% voted HIGHER
Mortgage purchase applications are down 18% year-over-year. The only recovery in housing at this point is the new and high end market ($1M+). Hedgeye's expectation remains that the back half of this year, and the first half of 2015, should see steady downward pressure on the rate of home price appreciation.
In the video below Housing Sector Head Josh Steiner states that various aspects of the U.S. housing market are deteriorating and describes how changes in housing prices and volumes are causing a major inflection point in this $18-19 trillion asset class.
We wanted to know what you think. Is the U.S. housing market heading higher or lower?
At the time of this post, 54% voted LOWER, 46% voted HIGHER.
Voters who forecast the U.S. housing market heads LOWER reasoned:
Those who voted HIGHER had this to say:
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
Takeaway: No matter what anyone says, it is not different this time.
Hedgeye Restaurants sector head Howard Penney says that unless management is changed at Darden, shareholders can expect more of the same from the company.
Takeaway: Still no sign of negative inflection from the claims data.
This is an excerpt of a research note published earlier today.
"For as this appalling ocean surrounds the verdant land, so in the soul of man there lies one insular Tahiti, full of peace and joy, but encompassed by all the horrors of the half-known life. God keep thee! Push not off from that isle, thou canst never return!" - Herman Melville, Moby Dick
The labor market appears to be the "insular Tahiti" Melville speaks of, surrounded by an appalling ocean of miserable data. Evidence continues to mount that the consumer is getting increasingly squeezed on the back of rising costs (commodities +11.6% YTD) and stagnant wages (personal income is +1.9% YTD). What's an investor to do?
Our take is that investors should stick with claims as their weathervane. It's been a prescient indicator of turning points, marking both the top and bottom of the last cycle clearly and in a timely manner.
Along those lines, rolling initial jobless claims (NSA) were 9.0% lower than at the same point last year, which was in-line with the trend over the past 5 weeks (-9.8%, on average). The 9.0% improvement marks a slight deterioration vs the prior week's 10.1% improvement but isn't anything we'd get overly excited about.
Prior to revision, initial jobless claims fell 0k to 312k from 312k WoW, as the prior week's number was revised up by 2k to 314k.
The headline (unrevised) number shows claims were lower by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2k WoW to 314.25k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.1%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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