Why Merrill Lynch Loves Nike, Under Armour and Footwear Retail Stocks

Investing

Published: January 22, 2016 10:40 am

Last Updated: January 13, 2020 2:42 pm

The beautiful thing for investors when they buy the top companies in casual athletic wear and footwear is that eventually the products, no matter how well they are actually made, wear out. It’s sort of a built-in planned obsolescence that consumers don’t mind, because they need and want the product.

A new Merrill Lynch research note is very positive on the sector, and the numbers are impressive. In fact, the report notes that while January is typically a slower month for casual athletic wear, the sales are continuing to stay solid, while athletic footwear sales on a trailing four-week basis increased 9.4%, with average selling prices rising 2.2%.

Merrill Lynch has four top stocks that are rated Buy in these consumer discretionary sectors, and the stocks are offering some of the best entry points in almost a year. Two are retailers and two are the leaders in the leisure athletic world.

Nike

This stock had an outstanding 2015 but is down 15% in January. Nike Inc. (NYSE: NKE) is the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. With one of the most recognizable brands in the world, long-term investors may do very well adding shares here despite the big move up in the stock last year.

Wholly owned subsidiaries include Converse, which designs, markets and distributes athletic lifestyle footwear, apparel and accessories, and Hurley International, which designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories.

Nike benefits from consumer preferences for “athleisure.” With the company’s extensive product line and recognizable worldwide branding, the stock continues to roll year after year. Driven by its digital business as well as inline and factory stores, the company now anticipates achieving $16 billion in revenue by the end of fiscal year 2020.

Over the next five years, incremental growth in Nike Brand Direct to Consumer (DTC) revenues is expected to be driven by e-commerce sales, which are projected to grow to $7 billion. The company also expects to drive wholesale growth in the mid-to-high single-digit range over the next five years.

Nike investors receive a 1.05% dividend. The Merrill Lynch price target for the stock is $72, and the Thomson/First Call consensus target is $72.56. Shares closed at $60.56 on Thursday.