Nike Entering Shleifer Effect Watchlist

July 5, 2012 — Leave a comment

 

I’m catching up on some of my screens from last week, and I notice that Nike (NKE) took a big hit on news that it missed consensus earnings estimates by about 15 percent. The price dropped over nine percent on the news.

MarketWatch provides a news write-up here. Revenue was up 12 percent for last quarter, but earnings dropped about eight percent. Costs went up, the company increased marketing spending in preparation for the London Olympics, orders from China dropped quite a bit, and it reduced it earnings growth guidance for the year.

Here are some of the analyst quotes pulled from  MarketWatch article (mainly for entertainment purposes):

It’s “a rare miss for Nike,” said UBS analyst Michael Binetti, who added he’s “disheartened to hear” that the company’s gross-margin recovery will be pushed out again after three straight quarters of missing its own targets.

 

“Nike becomes a much trickier stock from here,” according to ISI Group analyst Omar Saad. Sales “may no longer be enough for investors to overlook the company’s perplexing ongoing margin pressure.” Saad also said the margin miss makes him “a little concerned that this highly sophisticated, dominant, global consumer company does not have as good a handle on its costs as one would hope.”

 

Nike is an incredible brand. An icon really. It’s down about 20 percent from its 52-week high, but that $115 price was being fueled by a lot of optimism. It’s now trading around 20x earnings trailing twelve month earnings. That’s not cheap unless we think those earnings are depressed for some reason. A quick view of Morningstar data shows that Nike is actually near an all time earnings  peak.

For now it’s on the watchlist, but I would want to see some more healthy pessimism behind this before saying it’s a prime Shleifer Opportunity.

Paul Dryden

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