In after hours trading today, Nike stock has fallen nearly 5% to the $52 range. It is my opinion that this makes Nike stock one of the ten most attractive investment candidates right now with a constant-currency P/E ratio of only 22 and a reported P/E ratio of 24. Usually, there aren’t many large-cap companies that can be fairly described as cheap when they trade at that kind of price to earnings valuation level, but the strength of Nike’s balance sheet coupled with its very impressive revenue growth continue to make it an exception.
I thought the earnings report was excellent. In a constant currency basis, sales grew by 10% (7% when adjusted for the strength of the U.S. dollar translation.) This is a company that is actually still doing things the old fashioned way to deliver shareholder returns–it is selling more and more of its product each year. It’s far more impressive than many of the other stodgy names I cover such as Procter & Gamble, Kellogg, and General Mills, which at this point in their business life cycle are better conduits of preserving inflation-adjusted wealth rather than building future fortunes.
Don’t get me wrong–there’s a place and time for investments like Procter & Gamble–family-run businesses that churn out $10,000 in distributable cash flows each month would do well to throw $500 per month at Procter & Gamble for the next couple of decades because the combination of safety and security is extreme that it can offset the lack of double-digit growth. But for investors that are trying to turn x into 2x over the next 4-5 years, Nike is going to be far superior to just about anything else you can find.
I imagine the 5% drop in today’s stock price resulted from Nike’s report that future orders in North America are only up 1%, as the earnings growth is currently being fueled by 19% growth in China, 11% in Japan, and 10% in the basket of countries that Nike labels the emerging markets.
Most impressively, Nike reported earnings per share of $0.73 for its fiscal first quarter compared to expectations of $0.56 per share. If the rest of Nike’s year beats by the same amount, the earnings power of Nike stock is somewhere around $2.40 per share right now for a P/E ratio of only 21.6.
For people looking to establish a position in Nike stock, the current fashionability of Under Armour as a competitor with everything going right has probably caused some people to overlook Nike right now. It’s funny thinking just a year ago Nike was trading at $68 per share. Now, it is at $52. The crazy thing about it? Earnings are about 20% higher now than they were last year.
Usually, when a company falls 5% or more after an earnings announcement, you have to perform some deep-thinking to figure out whether the market’s reaction to some bit of bad news is actually worse than the amount of impairment that diminishes the stock’s intrinsic value. Here, the downside is less than what you typically see. Nike is a stock that has seen its stock price fall by almost $20 per share from last year’s high while it still grows revenues at a double-digit clip and is reporting constant-currency earnings in the 15-20% range. This combination of high growth mixed with a reasonable P/E ratio make Nike stock one of my top ten investment ideas that exist in the fall of 2016.