In a recent note on Livewire Markets, Mary Manning from Alphinity promoted Nike as her top pick for 2024, suggesting the stock was now in an upgrade cycle after two very difficult years. At MM, we think there could be an interesting opportunity evolving; with NKE US down over 40% from its 2021 high, we believe the view is premature, and there are still some important unknowns as we start the year.
Their most recent 2Q report was a disappointing one, as they lowered sales guidance, lowered margins and announced a plan to reduce costs, which is an uncharacteristic move for Nike and suggests that conditions remain tough. They are losing market share in the important running category, and there is some legitimate concern as to whether their product innovation is as good as it has been in the past. Looking at earnings growth over the past 4-years shows compound growth rates of ~6%, about half their historical average, and this needs to improve to justify a higher share price.
We do love the brand and know that buying high-quality stocks when they are on the nose can yield great returns, and if Nike can recapture historical growth in the mid-teens on a current PE of 28x, it looks ‘cheap’ for such a well-established global ikon. However, recent trends suggest this is not yet happening. The catalyst to change this is top-line growth rate acceleration, and this is what we’ll focus on in their upcoming results in March; however, until then, we think the stock will remain under pressure.
- We like Nike as a business, and the risk/reward is improving. However, we need to see tangible evidence of improved growth rates before agreeing that it has entered an ‘upgrade cycle’.
