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Nike’s Rating: Upgrade from HSBC, Downgrade from Baird

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Rating changes

On January 9, HSBC upgraded Nike (NKE) to “buy” from “hold.” The target price increased to $95.00 from $92.00. However, Baird lowered its rating for Nike to “neutral” from “outperform.” The stock fell marginally (0.2%) and closed trading at $76.59. So far in January, Nike stock has gained 3.3% as of January 9. In 2018, the stock gained 18.5%.

As of January 9, among the 37 analysts covering Nike stock, ~65% recommended a “buy,” 32% recommended a “hold,” and 3% recommended a “sell.” Analysts’ 12-month average target price for Nike stock is $86.38, which reflects a 12.8% upside based on its stock price on January 9.

Nike’s 12-month forward PE ratio was 26.1x as of January 9. Under Armour (UAA), Skechers (SKX), and Columbia Sportswear (COLM) had PE ratios of 58.4x, 12.5x, and 20.9x, respectively.

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What lies ahead for Nike in 2019?

Nike’s strong operations in China and fast-growing Nike Direct business are the main contributors to its revenue growth. Nike has witnessed double-digit revenue growth for 18 consecutive quarters in Greater China. In the second quarter of fiscal 2019, Greater China saw 26% year-over-year revenue growth.

Nike is focused on enhancing its digital operations. The company is confident that its digital penetration will rise to 30% of its total business by 2023 from 15% currently. In Nike’s second-quarter conference call, management stated that the business opportunity in China and other international markets could continue to grow as the sports culture expands. Product innovation could also contribute to the top-line growth.

Nike has forecast its fiscal 2019 revenue growth, on a currency-neutral basis, to be stronger than expected and reach the high-single-digit or even the low-double-digit range. As forex headwinds intensify amid macroeconomic uncertainty, Nike expects its overall top-line growth to be marginally lower than its currency-neutral growth.

For fiscal 2019 (ending in May), analysts expect Nike’s revenues to grow 7.8% to $39.23 billion.

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