Is NKE a "buy" ahead of earnings?
Nike, Inc. (NYSE: NKE -- $113.37) is a world-renowned sports brand focusing on the design and manufacturing of footwear, apparel, and sporting equipment. The company will be reporting its fiscal third-quarter earnings after-market today, Tuesday, September 22, and is currently expected to post major improvement over their fiscal second quarter earnings. Since hitting its 52 week-low of $60.00, NKE stock has shot to new all-time highs. On September 15, NKE hit $120.48, signaling 100% increase from its 52-week low. The stock has since settled around $114 ahead of the earnings announcement today.
As for today's earnings report, Nike is expected to bounce back from the -0.51 that was reported for second quarter. The company is currently expected to report an EPS of 0.44 for Q3 2020. Further, Nike's first and second quarter earnings in 2020 were both swings-and-misses. The last time the company beat earnings estimates was during the fiscal fourth quarter of 2019.
Nike has reported a decrease in EPS for every quarter since their fiscal third quarter of 2019. In the latest earnings report (fiscal second-quarter), Nike missed earnings by 0.58. Due to the pandemic, the company was expected to have a huge drop in EPS from 0.53 to 0.07. Instead the company reported a much more drastic drop. In Q2 2020 Nike reported an EPS of –0.51, signaling a decrease of 1.04. Nike's company’s balance sheet currently holds $31.342 billion in assets and $23.287 billion in liabilities. Their total equity currently stands at $8.055 billion.
Nike’s current price/earnings ratio currently sits at 70.86. The company has maintained its dividend of $0.245 per share. Nike has continued to grow their dividends since it started in 2007.
Although the NKE stock price during has suggested a boom in investor optimism in the company, the reality is that Nike’s latest quarterly earnings don't encourage optimism on the surface, at all. The stock is currently priced-in for a complete recovery. At the very least Nike will need to meet the high expectations that are out there. Even if the company meeting their earnings expectations may still not be enough to prevent a drop in the stock price. In terms of revenues and net income, the company is still underperforming as compared to its pre-COVID numbers. It is unlikely that the company will reach all-time highs post-earnings, without incredibly compelling numbers to back up an instant recovery for the company.
A 70.86 price/earnings ratio like Nike is toting at the moment is usually only seen on fast-growing tech stocks. With such a massive P/E ratio, investors are going to have a hard time justifying a buy at this point in time. A positive for Nike, regardless of earnings expectations, is that their fiscal third quarter revenue release should signal the end of a downward earnings spiral over the past 12 months.
According to analysts ahead of today's earnings, Nike needs to look to shift more of its focus to online sales since the last quarterly report. With an anticipated increase in online sales as well as the restarting of sporting events worldwide, Nike should see decent growth in revenue this coming quarter. Overall, the company is presenting as a long-term opportunity at its current lower-than-usual pricing.
Click here for our analysis of the options pits ahead of Nike's earnings report release after the closing bell.