Here's Why Nike Is an Attractive But Under-Appreciated Investment

The athletic apparel and footwear maker, once a darling of Wall Street, has taken a beating this year, and value investors should take notice.
By Siddhi Bajaj ,

Sales of athletic apparel and footwear giant Nike (NKE) - Get Report hit a record high in the fiscal fourth recent, which should be music to investors' ears.

However, while revenue for the quarter was up and rose 6% for the full fiscal year, the figures missed expectations.

Also, while profits rose 15% for the year, they actually 2% to $846 million for the quarter.

With the stock falling for seven straight months, is it time to cash out or load up on Nike? Value investors lick their chops at rare opportunities to buy inherently strong stocks trading at a bargain.

Rising sales in Western Europe, Nike's second-biggest market, and growing demand for the company's footwear and apparel in greater China were big positives, but the strength of the dollar has eaten into the company's profit margins.

In addition, the pandemonium in currency movement following the U.K.'s decision to leave the European Union will definitely take another bite out of the company's profits.

Had it not been for the negative impact caused by foreign-currency movement, quarterly revenue would have climbed 9%.

Currency swings aside, one of the most important metrics displayed an unfavorable trend.

Nike's future orders growth in North America, its largest market, slowed for the fourth straight quarter and missed analyst estimates.

Although analysts expected 13% overall growth and 9% in North America, Nike said that demand was rising 11% and 6%, respectively.

Future orders are a crucial gauge because they give a sense of the brand's demand for the next few months.

Meanwhile, Nike faces competition from all directions. Although Lululemon andUnder Armour are grabbing market share in apparel, Adidas has found many takers for its Superstar sneakers.

However, even after the latest earnings results, Nike Chief Executive Mark Parker is confident that the sportswear giant is well positioned to achieve its ambitious sales target of $50 billion annually by 2020.

The latest quarter showed that even though revenue from North America was flat, other markets such as greater China, Japan and Western Europe have displayed a strong preference for Nike.

Also, Nike subsidiary Converse has substantially narrowed its sales decline from 10% last quarter to end the year down 1% in revenue.

Analysts aren't giving up on Nike just yet, and neither should investors, as the stock is still a compelling investment proposition.

Of the 34 analysts covering the stock, 25 of them rate it buy, and none have a sell rating, according to Bloomberg.

According to analysts tracked by Thomson Reuters, 27 analysts offering 12-month price targets for Nike have a median target of $66, which would represent a gain of nearly 19%.

Some of them even see the stock shooting past the $100 mark, which would be an upside of almost 80%.

Since the recent decline, Nike's stock trades at 21 times forward earnings, which is down 12% from its historical average. With international markets accounting for more than 50% of Nike's revenue and expanding all the time, Nike is an attractive but under-appreciated investment.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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