Nike Leads Dow 30 Higher, More Upside Could Be Ahead

Nike Surges On Revenue Strength And Wider Margins

Shares of Nike (NYSE: NKE) are up more than 8% in the wake of the FQ3 earnings report and are leading the Dow 30 higher. The DJI is up nearly a full percent with the aid of Nike and it, too, could be heading higher. The move is spurred by better than expected results that include wider margins but there is a major hurdle ahead for both Nike and the Dow in the form of technical resistance. In the case of Nike, technical resistance is near the $139.75 level, just above the current price action, and it is consistent with a previous level of support. If the market can not get above this price point the stock will most likely offer up another entry point at a lower price, possibly as low as the $120 level or lower because Nike is still very highly valued relative to the broad market. 

Nike Has Strong Quarter Despite Systemic Challenges

Nike had a good quarter to be sure but perhaps not as strong as it could have been. The company reports $10.87 billion for the quarter or up 4.9% over last year and a 3rd quarter record. The revenue also beat the consensus by 245 basis points and may have been stronger but the company did not attempt to quantify its headwinds. On a segment basis, Nike Direct grew by 15%, digital sales grew by 19%, and apparel sales by 9% while footwear grew by a tepid 2%. 

Moving down the report, the company widened its gross margin by 100 basis points and more than expected but that’s where the good news ends in terms of margin. The operating margin contracted due to higher input costs, a 15% increase in inventory, and higher wages to leave net income down on a YOY basis. On the bottom line, the $.087 in GAAP earnings beat the Marketbeat.com consensus by $0.15 but is down $0.03 from last year. Looking forward, margin losses may be made up by future price increases and/or efficiencies but there is no guarantee when or if that will happen.

As bad as the earnings decline is earnings are still strong and helping to strengthen Nike’s already fortress-like balance sheet. The company’s cash flow and FCF allowed it to grow its cash balance by 7.5% to $13.5 billion while paying dividends and buying back stock. The company paid $0.484 billion in dividends during the quarter and repurchased $1.2 billion in stock as part of its 4-year $15 billion plan approved roughly 4 years ago. Unless the company issues another repurchase announcement that is a major tailwind that is about to stop blowing. 

The Analysts Drive Nike Higher, But Is It Enough? 

The analyst liked what they saw in Nike’s report and issued a round of mostly positive comments. At least 6 of the 30 analysts covering the stock issued statements to include 4 price target increases, 1 price target reduction, and 1 reiterated Outperform rating and a price target of $163. That compares to the Marketbeat.com consensus target of $171.50 which is about 48% above the recent price action. 

The Technical Outlook: Nike Bottoms But … 

Shares of Nike bottomed even before the earnings release and moved higher in its wake but resistance capped gains below $139.77. If this continues the odds of Nike moving lower to retest support near $120 will grow daily. If Nike can not maintain support at the $120 level a move down to $100 is not out of the question. Assuming the stock can get above $139.77 it may move up to the $160 region. In either case, we see a greater chance of this stock trading sideways within a range than effecting a sustained up or downtrend. Our targets are $120 for support and as high as $150 for resistance.