Why This Analyst Thinks Nike’s Run Could Be Over in 2017

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Nike Inc. (NYSE: NKE) was the worst performing Dow stock in 2016, but now it is closer to the top of the list in 2017. Despite making such a strong start to the year, one key independent research firm sees slowing growth at the athleisure giant, not to mention increased competition. As a result, this firm downgraded Nike and adjusted its view on the global marketplace for apparel.

Argus downgraded Nike to a Hold rating from Buy, as the firm expects revenue and earnings growth to slow over the next 12 months, driven by competition from Adidas and Under Armour.

The firm also reduced its fiscal 2017 earnings estimate to $2.41 per share from $2.50. In fiscal 2018, Argus expects significant foreign exchange headwinds and higher demand creation expense. As a result, it lowered the fiscal 2018 earnings estimate to $2.65 from $2.80 per share.

Consensus earnings estimates from Thomson Reuters are $2.41 and $2.58 per share in fiscal 2017 and fiscal 2018, respectively.

The firm sees Nike’s current price-to-earnings (P/E) multiple increasing modestly over the next several quarters, given high international inventories amid decelerating revenue growth in Europe and China. If Nike is able to sustain or improve current revenue trends, or improve futures orders significantly, Argus would consider an upgrade.

Over the long term, Nike is expected to continue to dominate the athletic apparel and footwear market, and the firm notes 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, Argus expects the company to build on its dominant position through its globally recognized brand, innovative products, economies of scale and rapid growth in emerging markets.

Argus also mentioned that Nike’s earnings face risks from rising input, labor and freight costs, as well as from decreased consumer spending worldwide. Sales have been hurt by economic weakness in Europe. Nike’s global portfolio is diverse enough to withstand weakness in any individual market, but it also exposes the company to exchange rate risk.

Shares of Nike were trading down 0.9% at $55.06 on Tuesday, with a consensus analyst price target of $62.36 and a 52-week trading range of $49.01 to $60.68.