Consumer Products

The Bullish and Bearish Case for Nike in 2015

The bull market is now nearly six years old. The Dow Jones Industrial Average rose by 7.5% and the S&P 500 Index rose by 11.4% in 2014. Those gains are not inclusive of dividends, but Nike Inc. (NYSE: NKE) closed out the year 2014 at $96.15, for a gain of 23.8%, including its dividend adjustments. 24/7 Wall St. has undertaken a bullish and bearish review of Nike to evaluate both sides of the coin and to see what lies ahead for the sporting apparel and sporting goods giant in 2015.

One key consideration for the year ahead is that Nike enjoys a very powerful brand globally. It would not have been added to the Dow had that not been the case. Still, Nike is valued at almost 23 times its earnings per share for fiscal 2016, which ends in May. That is well above the market average. Then investors have to consider that they only get a 1.1% dividend yield.

What is happening is that investors are having to pay up handily for top-line growth of close to 10%. Most Dow stocks are just not growing that fast each year. Nike is expected to have generated $33.5 billion in sales for its fiscal year-end. Its sales were just $23.3 billion in 2012.

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Shares traded in a range of $69.85 to $99.76 in 2014, and Nike’s consensus analyst price target of $102.00 would imply upside of 6.1% this year. Then there is the dividend yield of 1.1% to consider.

So, what are the most bullish and bearish views? The lowest analyst price target is $88.00, which implies somewhat limited downside on the surface. The most ambitious price target is $115. Nike’s most recent earnings report showed that gross margin was roughly 45%. Another positive is that Nike is still buying back stock under its $8 billion share buyback plan — with more than $3 billion remaining available for share repurchases as of the end of the most recent quarter.

Investors may not be too impressed with a 1.1% dividend yield. Is it possible that this is all Nike can pay? A $1.12 annualized dividend payout seems low compared to a $3.58 earnings per share estimate for the current fiscal year. Still, much of Nike’s cash could be tied up overseas.

After a dividend-adjusted performance of 23.8% in 2014, Nike’s total expected upside with the dividend included is expected to be 7.2% in 2015. When we ran the same bull and bear outlook for 2014, analysts were only looking for less than 4% upside — yet Nike blew that expectation out of the water. The most bullish case of $115 in Nike’s stock would imply upside of almost 20%, before considering the dividend yield.

Investors are constantly comparing Nike to Under Armour Inc. (NYSE: UA), due to its growth and major stock performance. This may seem fair when you consider that Under Armour is now worth about $14 billion — on less than $4 billion in expected 2015 sales. Still, Nike has been around for more than a generation. Even though Under Armour was one of the top 24/7 Wall St. stocks for 2014, Nike’s dominance is far from being threatened by Under Armour, Reebok, Adidas and myriad other brands around the globe.

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Nike does have global currency risk. It has emerging market risk too. That being said, it was also earmarked to benefit from potential window dressing for year-end stock buying. At the end of the day, whether investors and consumers choose Nike or competing brands, Nike has a market cap of $83 billion for a reason.