Nike is a great company to hold in a well diversified portfolio. The challenge at this stage is that its valuation appears to be somewhat lofty based on earnings projections and taking into account its recently announced 4 year $15B stock repurchase program.

I will not be adding to my current position at current levels.

 

Summary

• After the market closed on September 25^th, NKE reported Q1 FY2019 results and its share price pulled back ~4% in afterhours trading. The share price rebounded to close down only 1.25% on September 26^th.
• The Federal Reserve increased rates 25 basis points on September 26^th and a further increase is anticipated in December. If interest rates continue to increase, I suspect share prices, in general, will come under pressure.
• NKE shares appear to be overvalued based on projected earnings and I will patiently wait for a pullback before adding to my existing position.

Introduction

In preparing to compose this post I couldn’t help but think of Brookfield Asset Management’s CEO’s ‘Talks at Google’ presentation for which I provided a link in my September 23^rd Brookfield Asset Management – Durable Principles for Real Asset Investing article. At 1:05 of that video presentation is an image of countless sheep marching in the same direction and falling over a cliff. Amongst all the sheep marching to their death is one sheep going against the crowd saying ’Excuse me…excuse me’.

How does this relate in any way to this Nike (NYSE: NKE) post? Well, if we look at NKE’s stock price we see that it has gained:

• ~3% since September 3^rd when it released its controversial ad campaign featuring former NFL player Colin Kaepernick;
• 36% in 2018;
• ~59% in the last 12 months.

Sure, if NKE had dramatically increased earnings in such a short timeframe or if the stock price had been grossly undervalued a year ago, or at the beginning of the calendar year, then growth to the extent reflected above might be justified. The thing is, NKE has increased earnings and is on track to experience further growth but not to the extent one would expect to justify a significant share price increase.

At the time of my March 24^th post, NKE had just reported $0.48/share in diluted EPS on March 23^rd for the first 9 months of the fiscal year versus $1.91/share for the previous fiscal year. This deterioration in EPS from the previous fiscal year’s first 9 months was attributable to a significantly higher income tax expense from the enactment of the Tax Cuts and Jobs Act (TCJ); the 9 month results included one-time provisional charges that reduced diluted earnings per share by $1.25 to ($0.57)/share for the 3 months ending February 28, 2018.

At the time of that post, the consensus forward adjusted EPS estimate from 37 brokers for FY2018 was $2.35. When I used the March 23^rd $64.63 closing stock price, I arrived at a forward adjusted PE of ~27.5 and viewed this as a somewhat elevated level.

When year-end results were released June 28^th, NKE reported $1.17 in diluted EPS and $2.38 in adjusted diluted EPS; shares closed at $71.70 on June 28^th. On this basis, NKE’s PE was ~61.28 or ~30.1 on an adjusted basis.

Now that NKE shares have risen significantly subsequent to March 24^th and June 28^th and Q1 FY2019 results have just been released I thought I would take a quick look at NKE to see whether many investors are like the countless sheep in the video presentation I reference at the beginning of this article…granted marching to their death is a bit extreme. The message I want to impart by referencing this image is that as an investor, it is often advantageous to go against the crowd.

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