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Nike Bull Predicts Strong Earnings Growth Potential

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Nike (NKE) stock rose 2.2% on December 5 as Goldman Sachs analyst Alexandra Walvis upgraded its rating to “buy” from “neutral.” Goldman Sachs also raised the price target for Nike stock to $112 from $95, implying an upside potential of about 19%. Moreover, it added the footwear and sportswear giant to its “conviction buy” list. According to TheFly, Goldman Sachs believes that Nike is geared up for a significant acceleration in its EPS growth.

Goldman Sachs expects 19% annual growth in Nike’s earnings over the next three years. Strong momentum in China, the appeal of the Nike brand among younger consumers, and increased penetration in apparel and women’s segments are seen as some of the company’s growth drivers.

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What analysts expect from Nike’s earnings

Nike’s Q1 of fiscal 2020 EPS of $0.86 grew 28.4% YoY (year-over-year). It also surpassed analysts’ expectations of $0.70. Higher revenue, lower effective tax, and share buybacks boosted the company’s earnings.

The company’s first-quarter revenue increased 7.2% to $10.7 billion, backed by strong direct-to-consumer sales and innovative products like the Air Max React 270. Nike’s digital business grew 42% on a constant currency basis. The company’s Nike and Sneakers apps are active in over 20 countries, and the company aims to expand these apps to additional countries.

Nike’s North America revenue grew 4% on a constant currency business in the first quarter. Its international business also continued to be strong. Notably, Nike’s Greater China revenue surged 27% in the first quarter. Goldman Sachs believes that China is a major growth driver for the company.

Goldman Sachs expects growth in the high teens from the company’s China business. Nike’s Greater China revenue has grown at a double-digit rate in each quarter for over five years.

Analysts expect Nike’s adjusted EPS to rise 19.7% to $2.98 in fiscal 2020, which ends in May 2020. Currently, analysts predict a 15.8% rise in its adjusted EPS for fiscal 2021. Analysts anticipate Nike’s fiscal 2020 revenue to grow 7.9% to $42.2 billion on the strength of its direct-to-consumer business. They forecast an 8.2% rise in the company’s fiscal 2021 revenue.

Nike’s strong distribution network and the momentum in its direct-to-consumer business drove its decision to stop selling its products on Amazon. However, the company plans to use Amazon Web Services to support its website and certain mobile apps. Nike and other retailers have been investing heavily in their digital capabilities to fight intense competition from Amazon and other online players.

Will the stock rise further?

Nike stock has risen 30.8% YTD (year-to-date). It is a component of the Dow Jones Industrial Average (DIA). On December 6, the footwear and apparel giant outperformed the Dow Jones, which has risen 20% YTD. The US-China trade war is likely to be one of the key factors influencing the Dow Jones and its key components.

However, Nike lags the stock movement of some of its peers such as Skechers and Lululemon (LULU). On December 6, Under Armour, Skechers, and Lululemon rose 7.3%, 73.6%, and 88.6%, respectively.

According to CNBC, Cowen & Co. analyst John Kernan predicts that Lululemon could be the next Nike. His optimism about Lululemon is based on its e-commerce sales and growth opportunities in its menswear and international segments.

Lululemon plans to announce its third-quarter results on December 11. Analysts expect Lululemon’s third-quarter revenue to grow about 20% YoY to $899.64 million. They also expect the company’s EPS to rise 24% to $0.93 on strong sales and better margins.

Meanwhile, Nike plans to declare its Q2 of fiscal 2020 earnings on December 19. Analysts expect the company’s revenue to rise 7.5% to $10.1 billion. They also expect its adjusted EPS to grow 10% YoY to $0.57.

Despite the impact of tariffs, the company expects its second-quarter revenue growth to be in line with its first-quarter revenue growth. Currently, 23 of 31 analysts believe that Nike stock is a “buy.” Six analysts rate it as a “hold,” and two gave it a “sell” recommendation.

The average 12-month price target of $102.97 implies that analysts foresee an upside potential of about 6% in Nike stock compared to its December 6 closing price.

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