Analyst Sees Nike Turnaround Coming to Fruition With Big Gains Ahead

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In the daily analyst upgrades and downgrades, Nike Inc. (NYSE: NKE) was featured quite positively with an above-consensus analyst call on Friday. The stock was raised to Outperform from Neutral at Wedbush Securities, and its price target was lifted all the way up to $74. Wedbush’s prior Nike target was $57, and the stock closed on Thursday at $64.11. The call is for 15% upside, before considering the 1.25% dividend yield.

Friday’s key upgrade was based on confidence for an inflection in margins and a return to growth in North America in 2019. The firm’s Christopher Svezia sees Nike’s guidance as suggesting that the building blocks should become more evident during the fourth quarter ending in May.

Earnings targets were also raised in the call. The fiscal 2018 estimate was increased to $2.24 per share from $2.22, and 2019 was raised to $2.67 per share from $2.53. Fiscal year 2020 earnings were set at $3.05.

Despite ongoing market share, restructuring and promotional challenges, Wedbush pointed out that recent sentiment has been more positive after a less negative analyst meeting and after recent retail earnings reports were just not as bad as many analysts and investors feared.

Svezia said:

The cadence of new footwear styles are notably higher vs a year ago and the pipeline embraces more retro and casual silhouettes (Air 270, Shox Gravity, Epic React) versus largely a single technical style LY (VaporMax). At the same time comparisons are easing, particularly around key categories like basketball and in some aspects, returning to growth.

And on the retail environment not being as bad as so many people have feared, Svezia further said:

Our conversations with retailers also indicate that NKE has one of the biggest opportunities in 2018 to show improvement. International (55% of sales) also continues to perform while product initiatives, combined with Forex could lead to notable gross margin gains in Fiscal Year 2019. In short, the negatives are subsiding (North American weakness and gross margin walk-down) and the positives are accelerating (product, ASP, DTC and FX) leading us to believe +HSD sales, gross margin gains and mid-teens earnings per share growth is increasingly more likely in Fiscal Year 2019.

Perhaps the best news is regarding the North American market’s intense competition. Svezia believes an inflection point is likely in the year ahead, with more tangible product drivers around casual and lifestyle buying. And Nike has absorbed $1.8 billion in foreign exchange headwinds over the past three years but the firm expects transactional hedges to turn into a tailwind in fiscal¬†2019.

Nike shares reacted quite positively to the upgrade. Nike was last seen up 3.4% at$66.28, and the shares even hit a new 52-week high of $66.49. Nike’s market cap is $129.5 billion, and the consensus analyst price target was last seen at about $65.50.