Nike Inc. (NKE) is an American athletic apparel and footwear brand. It is known for marketing, designing, and distributing sports and fitness apparel, equipment, footwear, and accessories throughout the world, including North America, Latin America, Greater China, Middle East & Africa, Europe, and the Asia Pacific. It was founded in January 1964 as “Blue Ribbon Sports, Inc.,” but rebranded to its current name in May 1971.
I am neutral on Nike as its price target implies strong total return potential, and Wall Street analysts are overwhelmingly bullish on it, but its valuation multiples appear stretched relative to the company’s history.
Strengths
Nike is one of the largest suppliers of athletic shoes and apparel globally. It’s a powerhouse brand well-known for its swoosh logo and trademark catchphrase, “Just Do It.” Since it sponsors famous athletes and sports teams worldwide, it is almost synonymous with success in sports and has excellent brand recognition. Another major strength is that the Nike, Inc. brand includes many others under its umbrella, including Nike, Jordan, and Converse.
Recent Results
Nike’s second quarter of the Fiscal Year 2022, which ended November 30, 2021, had some great results. The reported revenues for the second quarter were $11.4 billion, up 1% from the previous year.
Of this, revenues for the Nike brand were $10.8 billion, while the revenues for the Converse brand were $557 million. Nike’s Direct sales were also up by 9% and reached $4.7 billion. Brand Digital sales also saw an increase of 12%, led by a significant 40% growth in North America. In addition to this, Nike’s gross margin increased to 45.9% by 280 basis points.
It should also be noted that dividends were up 14% from the previous year and reached $437 million. The total amount returned to shareholders was $1.4 billion, including both dividends and share repurchases.
Valuation Metrics
NKE stock looks a little overvalued here as it trades at a premium to historical averages on both a forward enterprise-value-to-EBITDA ratio and forward price-to-normalized-earnings basis.
Its forward enterprise-value-to-EBITDA ratio is 26x compared to its historical average of 23.2x, and its forward price-to-normalized-earnings ratio is 34.6x compared to its historical average of 32.1x. The dividend yield also looks quite lackluster at just 0.85% on a forward basis.
Wall Street’s Take
According to Wall Street analysts, NKE earns a Strong Buy consensus rating based on 17 Buys and four Hold ratings assigned in the past three months. Additionally, the average Nike price target of $187.60 puts the upside potential at 30.1%.
Summary and Conclusions
Nike has an extremely valuable brand that is recognized and respected across the globe. It has also proven itself to be a consistent market share leader that gives it considerable economies of scale and network advantages. As a result, the company has been a rare constant in the apparel, sports equipment, and fashion industries and is today a highly profitable global juggernaut.
On top of that, Wall Street analysts are overwhelmingly bullish on the stock, and the average price target implies considerable upside potential over the next year. That said, the stock price looks a bit stretched when examining its valuation multiples and dividend yield. As a result, investors might want to wait for a pullback in the stock price before adding shares.
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