Nike Close To Record High, But Still Worth Buying. Here's Why

In a world where Amazon (NASDAQ:AMZN) is killing its competitors, it’s tough to find another consumer company which has so consistently exceeded expectations. The sportswear giant, Nike (NYSE:NKE) is certainly one of them.

The company said on Tuesday it earned $0.86 a share in its fiscal first quarter that ended last month, crushing analysts’ estimates. These quarterly earnings per share topped even the most bullish Wall Street estimate by $0.13 cents. Sales rose 7% from a year earlier and expanded 10% after adjusting for currency swings.

Nike has topped quarterly earnings estimates more than 90% of the time over the past 11 years during a period when online disruptors, such as Amazon, gained a major share of consumer spending.

At the forefront of this great upside is the company’s “Triple Double Strategy,” which means doubling its resources on its digital properties, accelerating innovation and product creation, and deepening one-to-one connections.

Many executives use similar language when they communicate with shareholders, but when it comes to Nike, there is visible solid progress on the ground to back it up. The Nike brand has become a powerful, statement name, whose sports shoes and clothing ranges are now worn everywhere, and not just in the gym, or on the soccer field.

Nike Is Winning Everywhere

The result of these efforts is that Nike is grabbing a greater market share from its main European rival, Adidas AG (DE:ADSGN), even in its home market, while outperforming in the major growth markets of Asia.

In the latest report, Nike’s sales in China, for example, surged 27%, excluding currency effects, despite the escalating trade war that, technically, should hit American brands in the communist nation hard.

One major area where Nike has excelled is in its online strategy, which is helping to cut costs, boost sales and expand its margins. Nike’s digital sales rose 42% from a year earlier in its first quarter, after they rose 35% growth in the last fiscal year. In Q1, they expanded across all regions with North America posting a 30% gain, Europe, the Middle East and Africa a double digit increase, Asia Pacific and Latin America rising 50% and China jumping over 70%.

Nike maintained its year revenue growth target of high-single digits, but boosted its gross margin expansion forecast to 50-75 basis points. It had been projecting a 50-basis point increase.

Nike price chart

Such a strong report was enough to send Nike shares soaring. Its stock rose 4.16% yesterday to close at $90.81, having touched a new record of $92.79 during the day. After yesterday’s gains, the shares are up about 24% this year, continuing the spectacular ascent that has doubled their value during the past five years.

Following this powerful rally, Nike valuations look quite rich with its stock trading at a price-to-earnings multiple of about 35. That means a company which makes shoes and t-shirts will have to grow faster than Facebook (NASDAQ:FB), or Apple (NASDAQ:AAPL) to justify these valuations. The majority of analysts, however, don’t believe it will be a problem for Nike to pull that off.

Susquehanna analyst, Sam Poser, said:

“Compelling initiatives and strategic investments, particularly in digital, reinforce Nike’s evolution and should lead to sustainable high-single digit FX-neutral growth and margin expansion."

Bottom Line

Nike is a solid dividend-paying stock, offering a quarterly payout of $0.22 and a yield of 1.01%, that could be stashed in any long-term portfolio in order to benefit from the company’s strong growth momentum and expanding income stream. The strength in the company’s gross margin is especially encouraging. It shows the underlying soundness of Nike’s strategic initiatives which are transforming the sportswear giant into a high margin business.