By Bernstein analyst Aneesha Sherman is buying Nike (NKE) management’s view that “numbers are now de-risked”, and recommends investing in the footwear giant as it tumbles after Q1 earnings.
Nike recorded top-line revenue of $11.2 billion for its first financial quarter – down a more-than-expected 4% on a year-over-year basis albeit its EPS came in ahead of consensus at $0.48 a share.
However, a rather significant 26% currency-neutral slump in Greater China sales and conservative annual guidance re-ignited selling pressure.
Nike stock is now trading at about half its price in early January.
Why Bernstein recommends buying Nike stock
Despite the disappointing quarterly release, Bernstein maintained an “Outperform” rating on NKE shares, with a $45 price target indicating potential upside of nearly 40% from current levels.
According to analyst Aneesha Sherman, the company’s guidance bakes in near-term headwinds – anticipating high-single-digit sales contraction alongside operating margins hovering near 6%.
She dubbed the reduced outlook a necessary reset as the brand aggressively clears aged inventory across its core Lifestyle and Jordan franchises.
Additionally, by actively rightsizing its wholesale distribution exposure across Greater China, Nike is addressing structural oversupply and creating a cleaner – more sustainable operational baseline for upcoming quarters, Sherman added.
NKE shares are now attractively priced
Beyond management’s confidence that repeated downward revisions have successfully priced in near-term headwinds, Bernstein views the sharp post-earnings pullback as an attractive entry point for patient investors.
At the time of writing, Nike shares are trading at a price-to-sales (P/S) ratio of just over 1x only – a valuation multiple that represents a huge discount not just to the company’s historical averages, but to its industry peers as well.
Crucially, NKE currently pays a rather lucrative dividend yield of 4.95% as well, which makes it even more attractive as a long-term holding for income-focused investors.
What else makes Nike Inc worth buying today?
Aneesha Sherman views NKE stock as worth buying also because fundamental indicators within the quarterly report demonstrate that Nike’s underlying operating health is beginning to stabilize.
Q1 gross margins expanded 60 basis points year-on-year to 42.8%, buoyed by lower warehousing costs and improved logistics efficiency.
Concurrently, the sportswear giant is launching Pace – an operating model transformation designed to streamline overhead and reaccelerate product innovation within key athletic categories.
Backed by a fortress balance sheet featuring $8.4 billion in cash and short-term investments, Nike possesses ample financial flexibility to absorb restructuring expenses while preserving shareholder dividends.
For long-term investors, today’s reset – therefore – sets a “realistic bar”, turning the current post-earnings slump into a compelling tactical buying opportunity.
That said, the consensus rating on Nike Inc. sits at Hold only, albeit with a mean price objective of a little over $39 that suggests significant upside potential from current levels.
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