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Are Nike’s Valuations Justified?

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Valuations summary

In the current part of the series, we’ll discuss Nike’s (NKE) current valuations and its earnings potential in the near term. We’ll also see how the company compares to peers in terms of valuations.

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Nike’s current valuations

Nike’s stock is currently trading at 22 times the next-12-month earnings, operating close to the lower end of its 52-week price-to-earnings ratio (or PE) range of 21x to 31x. The company trades at a discount to Under Armour (UAA) and Lululemon Athletica (LULU), which are currently trading at a one-year forward price-to-earnings ratio of 49x and 28x. Columbia Sportswear (COLM) currently has valuations similar to Nike’s.

Earnings potential

After displaying a 24% growth in fiscal 2015 and 17% growth in fiscal 2016, Nike’s earnings per share (or EPS) growth is predicted to slow down to ~9% in fiscal 2017. As discussed through the series, rising competition and currency headwinds have been consistently weighing on the company’s performance.

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Comparing earnings potential to peers

While Nike is increasingly losing market share to Under Armour, the company continues to have better earnings potential compared to UAA over the next 12 months (or NTM). While Nike’s per share earnings are forecasted to increase by 6.3% over the next year, UAA is likely to register a decline of 8% in NTM EPS.

However, LULU and COLM have a stronger earnings potential. The NTM EPS of the two companies is forecasted to increase by 15.5% and 18%.

LULU has a better earnings NTM forecast as compared to Nike and Under Armour. Wall Street expects LULU’s EPS to jump 15.5% over the next year as compared to a -1% and 7% change in Under Armour’s and Nike’s earnings, respectively. The earnings of Columbia Sportswear are however expected to increase at a rate of 18% during the same period.

ETF investors seeking to add exposure to NKE can consider the SPDR Consumer Discretionary Select Sector ETF (XLY), which invests 2.9% of its portfolio in NKE.

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