Why Nike Stock’s Uptrend Could Persist

• Nike stock is up 28.0% year-to-date.
• Bank of America Merrill Lynch has upgraded Nike stock.
• Nike’s robust sales, margin expansion, and healthy EPS growth could drive its stock higher.

Bank of America Merrill Lynch upgraded Nike stock (NKE) to “neutral” from “underperform” yesterday and raised its target price to $98 from $70. Several catalysts could further boost the stock, which was up 28.0% year-to-date as of yesterday.

Nike’s shift to wide-margin geographies and direct-to-consumer business could expand its margins and boost its bottom line. Additionally, NIKE Direct, led by digital, could support the company’s revenue. Its robust lineup of innovative products and brand investments could further support growth.

Nike’s sales mix shift toward NIKE Direct could continue to drive its margins in future quarters. In the first quarter, Nike’s gross margins increased by 150 basis points and beat analysts’ expectations.

In the near term, Nike’s margin growth could soften a bit, reflecting its supply-chain and brand investments. However, its growing mix of direct operations and higher full-price sales could boost its margins in the long term.

The company’s peers are also benefiting from shifting toward direct-to-consumer business. In the last reported quarter, Lululemon’s (LULU) gross margin grew by 20 basis points, and its operating margin expanded by 50 basis points.

Nike’s sustained sales growth and margin expansion could drive its bottom line, and in turn, its stock. Share repurchases should further support its EPS growth.

Analysts expect Nike’s top line to grow by a high-single-digit percentage. Its digital transformation, demand for core products under $100, higher Jordan brand sales, and growth opportunities in the Women’s category could drive sales. Additionally, analysts expect Nike’s bottom line to increase at a double-digit percentage in future quarters, driven by margin expansion and share buybacks. They expect Nike’s adjusted EPS to rise by about 11% in fiscal 2020 and 19% in fiscal 2021. In fiscal 2019, Nike expects its revenue to grow by a high single-digit percentage, and its gross margin to grow 50–75 basis points.

Analysts’ average price target of $102.13 for Nike stock implies a 7.6% upside based on its closing price of $94.88 yesterday. Of the 30 analysts covering NKE, 21 suggest “buy,” seven suggest “hold,” and two suggest “sell.”