Company Beats the Street on Earnings—Again
There are very few genuine growth stories in this market and Nike, Inc. (NYSE:NKE) is one of them. It’s a formula that has made owners of NKE stock very wealthy.
This position is already an existing winner; it’s a momentum stock that has more legs in this market. It’s a top pick for large-cap investors and one of my favorite positions going forward.
All businesses and industries experience their own cycles. In a rising interest rate environment, however, it’s going to pay to weight your portfolio towards those businesses that are less rate-sensitive. Nike is such a company and it’s well positioned for outperformance over the coming quarters.
In its recent earnings report, the Beaverton, Oregon-based footwear giant announced a four-percent gain in sales over the same quarter last year, hitting $7.7 billion. This gain would have been 12% on a currency-neutral basis.
But, the big news with Nike stock is its bottom line, which in a slow-growth world, is the most important financial metric of all.
In its 2016 fiscal second quarter (ended November 30, 2015), the company’s net income improved a solid 20% to $785 million.
On a diluted earnings-per-share (EPS) basis, the bottom line grew 22% to $0.90 due to higher sales, improved gross margins, a lower tax rate, and a one-percent drop in its average common share float.
Nike stock’s 5-year chart is featured below:
Chart courtesy of www.StockCharts.com
What I like about this position is the “package” it offers investors.
Nike stock is less vulnerable to the effects of rising interest rates (it has plenty of cash on hand). The brand is growing both in the North American market and in China. The company’s growth outlook is solid for the rest of this decade and management is buying back a lot of its own shares.
According to the company, in its fiscal second quarter, which just ended, it bought back 5.6 million common shares for approximately $652 million.
Share repurchases work in a slow-growth world. They are very effective; they pay for dividends and they generally help keep investors happy on at least one important Wall Street metric. For Nike stock, diluted EPS growth is outstanding.
One of the things that the company does is it reports “futures orders,” which represent footwear and apparel scheduled for delivery in upcoming months.
From December 2015 through April 2016, Nike reported that its futures orders are running 15% higher compared to the same period last year. If not for currency translation, futures orders are about 20% higher than last year.
So, Nike stock has got a lot of momentum behind it, both operationally and on the stock market.
Institutional investors want earnings predictability, which Nike offers. The stock is highly liquid (another two-for-one stock split just went into effect) and Wall Street estimates for upcoming periods are going up.
I think this is a market for existing winners. There is not a lot of genuine growth to go around and for those large-caps that provide, such as Nike stock, they should continue to be institutional favorites.