Should Nike Shares be Purchased at Less Than $85 Each?
Nike's Slump and the Path to Recovery
Sportswear giant Nike (NKE 3.29%) is currently facing a challenging period. A series of strategic missteps and headwinds have led to stagnated sales growth and a significant drop in its share price, trading under $85 – a 30% decrease from its 52-week high. However, the company is not letting this setback discourage it. Let's examine if investors should consider scooping up these discounted shares.
A Difficult Year, But Glimmers of Hope
Nike reported lackluster results in its fiscal 2024, with a modest $200 million increase in sales compared to the previous year, and a 2% decline in its fourth quarter sales. Competitive newcomers like Hoka and On Holdings gained ground, capitalizing on Nike's missteps in innovation and inventory management.
In an effort to regain momentum, Nike is amplifying its investment in product innovation, collaborating with its retail partners to boost sales and develop new products that could reignite growth. While this transformation process is expected to take time, the company projects a mid-single-digit decline in sales for the forthcoming fiscal 2025.
On a more optimistic note, while its sales remain under pressure, Nike's earnings have gained traction. Initiatives to enhance pricing and reduce costs yielded a 12% increase in net income in the last fiscal year, climbing to $5.7 billion, with a 45% spike in fourth-quarter profits to $1.5 billion.
Attractive Valuation and Dividend Yield
Nike boasts a comparatively lower valuation compared to major indices, trading at a markedly reduced 24.5 times earnings compared to the S&P 500's 32 times and the Nasdaq-100's lofty 32 times multiples. Consequently, Nike's unique dividend yield of 1.8% stands out, topping the S&P 500's 1.3% and Nasdaq's 0.8%.
Analysts, such as Morningstar, estimate a premium valuation for Nike, setting a fair value estimate of $129 per share, despite adjusting their expectations due to the company's fiscal 2025 sales decline prediction. This assessment is higher than the $91.50 consensus price target set by analysts yet still indicates a discount compared to their perceived value.
To maximize the benefit of its lowered share price, Nike is investing in a $18 billion, four-year repurchase program. In the fourth quarter and last fiscal year, the company repurchased 11 million and 41.4 million shares for $1 billion and $4.4 billion respectively. This buyback initiative is accelerating the reduction in its outstanding shares by over 4% in the past two years.
Nike's robust cash reserves, widening to $11.6 billion in its last fiscal year, ensure it can continue prioritizing stock repurchases and dividends, while also funding capital projects. The company extended its dividend growth streak to 22 consecutive years with a 9% increase in its dividend last November.
Is Nike a Compelling Buy at Under $85?
Despite grappling with strategic missteps and experiencing sales declines, the multibillion-dollar company is not wavering in its pursuit of recovering its dominance in the sportswear market. Investors might find Nike alluring due to the glimmers of optimism from the company's improving earnings, attractive valuation, steadfast commitment to capital repurchases, and an extended dividend growth streak.
Given Nike's financial situation, investors might consider the following two sentences:
In light of Nike's strategic investments in product innovation and its lower valuation compared to major indices, some analysts suggest that this could be an opportune time for investors to consider investing in Nike's shares.
With its strong dividend yield and ongoing stock repurchase program, Nike's finance strategy could potentially appeal to income-seeking investors looking for a stable long-term investment.
