Nike Stock Upgraded to Buy at Goldman on Growing China Opportunity

The stock is higher Thursday as Goldman Sachs analysts say the athletic-apparel and -equipment icon is poised to take market share in a still-growing China market.
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Nike's (NKE) - Get Report story keeps getting better, if investors go by an upgrade and price-target hike from Goldman Sachs analysts. 

The stock at last check was up 1.6% to $95.19. Nike shares have outperformed the S&P 500 in 2019, with the Beaverton, Ore., athletic-apparel and -equipment giant gaining 25.6%, against the index's gain of 24.4%.

Just this week, Morgan Stanley analyst Kimberly Greenberger raised her price target on the stock to $118, simply rolling her valuation forward one year and citing Nike's shift to a digital strategy as central to her thesis. 

Goldman Sachs analyst Alexandra Walvis raised her price target to $112 from $95 and upgraded the stock to buy from neutral. 

"Our bottom-up analysis drives our confidence that Nike can grow China revenues at a high-teens pace. Direct-to-consumer is the biggest driver, reaching 50% of the region’s revenue on our estimates by 2023," Walvis said.

Nike has grown revenue in China at over 20% in 2019 so far. Analysts polled by FactSet are looking for 15% growth in the region in 2020 -- but Walvis sees an upside to that forecast as Nike takes market share in a still-growing Chinese apparel market. 

"We believe the Chinese activewear market will deliver double-digit growth," Walvis said, adding that Chinese sportswear spend per capita was $30 in 2018, compared with the U.S.'s $350. Activewear represented 11% of total apparel and footwear spend in China in 2018, compared with 33% in the U.S.

"We expect these numbers to converge," Walvis said, as more sportswear is adopted and middle-class incomes rise. 

And as Nike uses its direct-to-consumer strategy through its app and other digital platforms, the company's operating margin should fatten. 

With higher revenue growth and wider margins, Walvis now expects earnings per share to grow 19% for each of the next three years, justifying an expanded earnings multiple, she says.

She's looking for 2020 EPS of $2.98, above her previous estimate of $2.97. Her new multiple on 2020 earnings is 37, while the stock trades currently at 31 times.  

Walvis's estimates are ahead of consensus, which models 2020 EPS of $2.97 and an average price target of $104.