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Bank of America Merrill Lynch Downgrades Nike to ‘Underperform’

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Nov. 2 2016, Updated 8:07 a.m. ET

Price movement

Nike (NKE) has a market cap of $82.1 billion and fell by 3.5% to close at $50.18 per share on October 31, 2016. The stock’s weekly, monthly, and YTD (year-to-date) price movements were -3.3%, -4.7%, and -19.1%, respectively, on the same day.

NKE is now trading 3.2% below its 20-day moving average, 8.1% below its 50-day moving average, and 11.9% below its 200-day moving average.

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Related ETF and peers

The iShares Russell Top 200 Growth ETF (IWY) invests 0.98% of its holdings in Nike. The ETF tracks an index of US large-cap growth stocks selected from 200 of the largest US companies by market cap. The YTD price movement of IWY was 2.5% on October 31.

The market caps of Nike’s competitors are as follows:

  • F. Corporation (VFC)—$22.4 billion
  • Under Armour (UA)—$13.0 billion
  • Skechers USA (SKX)—$3.3 billion

Nike’s rating

On October 31, 2016, Bank of America Merrill Lynch has downgraded Nike’s rating to “underperform” from “neutral.” It also reduced the stock’s price target to $45 from $55 per share.

TheStreet reported that Najarian Family and Advisors Office Co-Founder Pete Najarian remarked that “the competition from Adidas (ADDYY)” has been “negatively impacting Nike stock.” According to the report, Najarian specified that “Adidas is making headway when you look at North America…they’re absolutely going right after Nike.”

According to the same report, Virtus Investment Partners Chief Market Strategist Joe Terranova stated that “Nike doesn’t seem to have the near-term momentum that Adidas does.”

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On the other hand, some analysts still think of the company as a value stock. According to TheStreet Jim Lebenthal, Chief Executive Officer of Lebenthal Asset Management, stated: “This is a stock that traditionally has traded in the mid-$20s as a multiple, much better than its growth rate. The reason it does that is because of the value of its brand.”

Nike’s performance in fiscal 1Q17

Nike (NKE) reported fiscal 1Q17 revenue of $9.1 billion, which is a rise of 8.3% from the $8.4 billion reported in fiscal 1Q16. Revenue from its Footwear, Apparel, and Equipment segments rose 6.8%, 8.9%, and 3.7%, respectively, and revenue from its Global Brand segment fell 42.3% between fiscal 1Q16 and fiscal 1Q17.

Nike’s revenue from North America, Western Europe, Central and Eastern Europe, Greater China, and Japan rose 6.1%, 7.4%, 9.7%, 15.1%, and 36.9%, respectively, in fiscal 1Q17. Its revenue from emerging markets fell 2.2% YoY (year-over-year) in fiscal 1Q17. The company’s gross profit margin fell 4.2% YoY.

Nike’s net income and EPS (earnings per share) rose to $1.3 billion and $0.73, respectively, in fiscal 1Q17, as compared to $1.2 billion and $0.67, respectively, in fiscal 1Q16.

Cash and cash equivalents

Its cash and cash equivalents fell 18.1%, and its inventories rose 10.9% YoY in fiscal 1Q17. Its current ratio fell to 2.7x, and its debt-to-equity ratio rose to 0.74x in fiscal 1Q17, as compared with 2.8x and 0.61x, respectively, in fiscal 1Q16.

In fiscal 1Q17, Nike (NKE) repurchased 19 million shares for ~$1.1 billion. On August 31, 2016, it scheduled the delivery of $12.3 billion in orders between September 2016 and January 2017. This figure translates to a 5% YoY rise in orders and a 7% rise on a currency-neutral basis.

In the next part, we’ll look at Fortune Brands Home & Security (FBHS).

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