Nike has had a volatile year and shares are down 11.8% YTD
The rating is high
Wall Street Consensus Is Bullish, With About 25% Expected 12 Month Profit
The market implied outlook for NKE is slightly bullish through mid-2022, but slightly bearish for the full year
I remember reading a long time ago that Nike (NYSE:) is best described as a marketing company that sells shoes rather than a shoe company. The company has set up a large number of internationally renowned products and marketing campaigns for many years. At the end of 2021, NKE moved beyond the physical production of shoes and clothing by designing and selling RTFKT virtual sneakers for the metaverse and producing shoe-related NFTs. The price of Nike stock has risen dramatically over the past 12 months, from $140 at the start of 2021 to a 12-month low of $127.1 in April, then rocketed to $173.85 on Aug. . The highest close for 2021 was $177.51 on November 5. Q4 on June 14 – Fourth quarter earnings per share were 82.7% above analyst expectations (Source: E-Trade). By mid-September, the stock had fallen significantly from their YTD highs, but then NKE posted another profit decline (albeit a small one) for FY Q1 on September 23, pushing the price soaring to reach the 2021 high close. Shares are down 11.8% so far this year.
Source: Investing.com
Nike is clearly very sensitive to new news and with the high valuation of 39x the stock is likely to also some exposure to interest rates. When I analyzed Nike on March 3, 2021, the analyst consensus outlook was bullish and the 12-month consensus price target was about $163.19% above the stock price at that time. NKE's valuation gave me pause, with a P/E well above that of the big tech companies. Along with the fundamentals and analyst consensus, I considered the options market consensus outlook, the market implied outlook. Options prices on a stock reflect the market's consensus estimate of the chances that the stock price will rise above (call option) or below (put option) (put option) a certain level (the option's strike price) between now and when the option expires . By analyzing the prices of call and put options against a range of strike prices, all with the same expiration date, it is possible to calculate a probabilistic price prediction that aligns option prices. These are the market-implied outlook. Last March, the market-implied outlook for NKE through January 21, 2022 (calculated on options expiring as of this date) was slightly bearish, with quite high volatility. With the high valuation, bullish Wall Street outlook and bearish market implied outlook, I've compromised on a neutral overall rating for NKE. Since that article was published, NKE is up 7.7% (excluding dividends), compared to 18.3% for the .
In my analysis I preferred to sell covered call options on NKE to generate revenue. In early March, it was possible to sell a call option on NKE with a $150 strike, expiring January 21, 2022, for $11.50 (as detailed in the March 3 post).
Today, that $150 call is trading at $0.72 and will likely expire worthless on January 21st. An investor who bought NKE for $137.09, the stock price when the message was published, would have made 8.1% of total return and an additional 7.9% of the sale of the covered call (accounting for the current value of $ 0.72), for a total return of 16%. This still lags the S&P 500, but the premium from the call's sales helped a lot.
As we approach the end point for the market implied outlook in my previous analysis (January 21, 2022) and by approximately 10 ½ months have passed and I have updated the market implied outlook for NKE for the coming year and, as before , compared to the consensus outlook of Wall Street analysts.
Wall Street Analyst Consensus Outlook for NKE
E-Trade calculates the consensus outlook for Wall Street based on the views of 20 ranked analysts who share the have published ratings and price targets for NKE in the past 90 days. The consensus rating for NKE is bullish, as it has been since my last analysis, and the 12-month consensus price target is 27% above the current share price. There is a fairly high level of agreement among these analysts, with the lowest individual price target indicating a 15% gain. Trade
Investing.com's version of the Wall Street consensus outlook is calculated by adding together the views of 35 analysts. The consensus rating is bullish and the 12-month consensus price target is 22.5% above the current share price, slightly below E-Trade's consensus value.
Source: Investing.com
Both the E-Trade and Investing.com calculations for the Wall Street consensus are bullish and both have 12-month consensus price targets above 22%, with a average of 24.7%.
Market-implied outlook for Nike
I generated market-implied outlook for the next 1.9 months (using options expiring March 18, 2022) , for the next 4.9 months (using options expiring on June 17, 2022) and for the next 12.1 months (using options expiring on January 20, 2023) to provide short-term statements and through 2022. Options that expire March, June and January are also usually very liquid, giving confidence in the significance of the market-implied outlook.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal. Now through March 18, 2022
Source: Author's calculations using option quotes from E-Trade
The market implied outlook for March 18 is highly symmetrical, although the peak in probability tilts very slightly toward in favor of negative returns. The annualized volatility calculated from this breakdown is 32.4%, which is moderate for a large-cap stock.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative returns side of the distribution. on the vertical axis (see graph below). The negative return side of the distribution is rotated about the vertical axis.
This view shows that the market implied outlook is almost perfectly symmetrical, with equal chances of positive and negative returns of the same magnitude (the red dotted line and the solid blue line are almost superimposed).
Theory suggests that the market-implied outlook is expected to be negative because risk-averse investors tend to overpay for downside protection (put options). The equity risk premium exists (theoretically) because investors want to be compensated to bear risk (they are risk averse), so the assumption of a negative bias in the market-implied outlook makes sense. With that in mind, a neutral market implied outlook (corresponding opportunities as we see here) should be interpreted as (at least) slightly bullish. June 17, 2022, the market implied outlook is similar and also interpreted as slightly bullish. The annualized volatility calculated with this outlook is 31.8%. The negative return side of the distribution is rotated around the vertical axis.
The market-implied outlook for the next year (calculated using options expiring on January 20, 2023) is shifting towards increasingly negative price returns. (the red dotted line is above the solid blue line across the left half of the graph). I interpret this outlook as somewhat bearish. The annualized volatility calculated on the basis of this outlook is 31.8%. calculations using options quotes from E-Trade. The negative return side of the distribution is rotated around the vertical axis. The market-implied outlook for NKE is slightly bullish through mid-2022, but slightly bearish for the next 12 months. The expected volatility is stable during the year at about 32%. My previous analysis yielded an (almost) 11-month outlook for NKE that is qualitatively similar to the new 12.1-month outlook, although the current outlook is less bearish.
Summary
]Nike is in many ways a separate category and therefore comparisons with peers are difficult. The stocks are certainly expensive, but the P/E is well below the highs of recent years. Looking ahead, NKE is increasingly focusing on the value of its design features rather than the utilitarian shoe business. Wall Street analysts' consensus rating is bullish and the 12-month consensus price target is 25% above the current share price. The market implied outlook is slightly bullish through mid-2022, but slightly bearish for the full year. The expected volatility is about 32%.
As a rule of thumb for a buy recommendation, I look for an expected return that is at least half the expected volatility. Analysts' consensus on expected returns is well above this threshold. I'm changing my rating on NKE from neutral to bullish, but I plan to review this analysis mid-year.
