Consumer Products

Argus Gets More Bullish on Nike

Nike Inc. (NYSE: NKE) is a darling of Wall Street and Main Street alike. Now independent research firm Argus sees even more good times ahead. Argus reiterated Nike’s Buy rating and raised its price target to $77.00 from $75.00. This is actually almost $5.00 higher than the consensus analyst price target.

Monday’s upgraded price target is after Nike completed its two-for-one stock split last week. Nike’s strength is being driven by worldwide store growth and the introduction of new footwear. Both trends are helping Nike to keep increasing its market share.

Argus also expect higher margins based on recent price hikes, moderating input costs and a less negative impact from foreign exchange. Argus said that under the four-year $12 billion share repurchase plan, Nike should finish buying back $1.5 billion worth of stock, which was still remaining on its previous authorization, by the end May 2016. The higher dividend is also listed as a plus here.

Monday’s research report said:

The company is targeting annual gross margin improvement of 30-50 basis points and slightly favorable SG&A leverage. It expects annual earnings to grow at a mid-teens pace. Nike has beat its earnings guidance in every quarter over the past three years, several times by double-digit percentages. Reflecting management’s accelerated growth targets, additional share repurchases, and history of positive earnings surprises, we are raising our FY16 EPS estimate from $2.21 to $2.22 and our FY17 estimate from $2.49 to $2.50 (per share).

What stands out is an expectation that the currency will be less of a drag. Another issue that will help Nike, but has been harm elsewhere to other companies, is China. The Argus report said of overall strength, currency and China:

Nike is working to boost results in China by dropping retail partners with disappointing sales and by diverting inventory to other markets. We believe that its business in China will recover, and note that revenue in China rose 28% in constant currency in the second quarter of 2016… Over the long term, we expect Nike to continue to dominate the athletic apparel and footwear market, and note that it has a particularly strong presence in high-end footwear thanks to its marketing strength and endorsements from famous athletes… Although the industry remains fiercely competitive, we expect the company to build on its dominant position through its globally recognized brand, innovative products, economies of scale, and rapid growth in emerging markets.

Reiterated Buy ratings alone do not often generate much interest, but raising price targets from above-consensus to even further above consensus do garner attention. Nike shares have risen nearly 40% over the past 12 months. Argus views Nike’s stock as undervalued, and 2016 should be yet another year that Nike should outperform the S&P 500.

The firm’s report on Nike concluded:

In view of prospects for 20% futures growth (in constant currency) from December 2015 through April 2016, we are raising our target price from $75 to $77, implying a multiple of 34.7-times our revised Fiscal Year 2016 estimate. Over the past five years, comparable apparel/footwear companies have traded at 26.4-times forward earnings. We believe that prospects for market share gains, innovative new products, and growth in the company’s direct-to-consumer business warrant a premium valuation. Our revised target price implies a potential total return, including the dividend, of approximately 20% from current levels.

Nike shares were up marginally on Monday morning to $63.41. The consensus analyst price target was last seen at $72.56, according to Thomson Reuters, and Nike shares have a 52-week range of $45.35 to $68.19.

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