NIKE, Inc. (NKE): Why This Sportswear Giant Could Face Challenges

The company is taking a long-term view over China, but for the very near term it expects Chinese revenues in the first half of its 2014 to be lower than last year and its future orders are flat on last year too. Any weakening in the Chinese economy will hurt Nike as the country currently provides nearly 22% of segment EBIT.

Where next for Nike?

Nike’s future orders indicate growth of 12% for North America and emerging markets, respectively, while Western Europe and China future growth is at 0%.This pretty much defines where the near-term growth will come from.

Analysts have low teens earnings growth penciled in for the next two years. I would argue that the stock is close to ‘fair value’  as it is currently generating 4.7% of its enterprise value in free cash flow.This suggests that the best its stock price can do is to return its earnings growth over the next few years. There is nothing wrong with this because low teens stock returns are fine for most people. On the other hand these earnings prospects will rely on the issues discussed above. An increasing reliance on North America and footwear could place pressure on its performance whereas a stock like V.F. Corp has a wider and more diverse range of brands.

By way of comparison V.F. Corp registered mid-single digit declines with Timberland in Europe (its strongest market) but was able to offset this by generating an incredible 30% increase in Vans sales in the region. Moreover it increased its global DtC revenues for The North Face and Vans by 25% and 20% respectively. Clearly the company has more opportunity to shift emphasis onto brands/geographies that are working and it also trades on an evaluation discount to Nike. V.F.Corp trades on 18x this years earnings while Nike trades at nearly 21 times earnings to next May.

In addition from a historical perspective Nike isn’t particularly cheap.

NKE Price to Earnings Less Cash TTM data by YCharts

In conclusion, the stock isn’t really a value prospect but more of a growth at reasonable price proposition. Ultimately an investment decision will be based on how you view its ongoing growth prospects. So with a degree of uncertainty over China at the moment I think cautious investors would do well to wait for confirmation of better conditions there before buying in here. Its evaluation leaves little room for error.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike.

The article Why This Sportswear Giant Could Face Challenges originally appeared on Fool.com and is written by Lee Samaha.

Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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