Is Nike An Undervalued Opportunity for Investors?
August 03, 2022 at 06:05 AM EDT
Nike (NYSE: NIKE) has been put on the watchlist of many investors following its sell-off. The company is currently down -32.94% YTD and significantly trails behind the S&P 500 at a -14.16% decline. Investors are watching this stock closely due to its performance significantly beating the S&P 500 over a long timeframe. The company returned 383.12% over the last ten years, while the return for this index returned 199.72%. Still, there are some challenges ahead for the company as it battles weakening growth prospects, and some still believe Nike to be an expensive pick. We will examine both the pros and cons of this stock to see if it deserves a spot in your portfolio.
Despite losing a considerable amount of the value of the stock, Nike's P/E ratio is still considerably higher than its peers in the consumer discretionary sector. The company's FWD P/E is 29.72, while the sector median is 13.41. To give an example of how it stacks up against one of its key competitors, Wolverine WorldWide (NYSE: WWW) has a P/E of 9.90. One could interpret Nike's higher than the sector median's P/E ratio in a couple of different ways. The company's long-term prospects could be seen as more attractive, so it, therefore, commands a higher price. The alternative interpretation is that it is relatively more inexpensive without the additional upside potential.
Bearish Growth and EPS Estimates
One factor that's holding the stock back from reaching new heights is the contraction in its YoY and FWD revenue growth estimates. The company's revenues are currently growing at an anemic rate compared to the industry sector with 4.88% compared to the median of 20.27%. Its FWD revenue projections are also not holding up that much better, with 7.88% compared to the sector median of 13.87%.
Nike Has Strong Margins and Profitability
One of Nike's biggest positives is that it beats its competitors in terms of its margins and overall profitability. The company has a gross profit margin of 45.98%, while the sector lags at 37.05%. Other metrics such as its net income margin are also strong at 12.94% compared to just 6.56% for the sector.