Nike (NYSE: NKE) is a top apparel company, and its iconic brand is understood world wide. Although its products are sometimes dearer than others, the corporate has managed to grow its business significantly for years. Today, its market capitalization is around $130 billion.
But recently, investors have grown fearful in regards to the company’s growth prospects. Business has been slowing down, and inflation is not helping. While the short-term headwinds can send it lower this yr (it’s already down 22%), this is the reason I believe the stock can still be a winner in the long term.
It has strong brand recognition amongst teens
Even when you’re not a customer of Nike’s and think its products are too expensive, the info suggests that there is still a variety of interest from younger people. The corporate’s brand ranks high amongst teens, in accordance with a report this yr from Piper Sandler.
The report found that Nike’s brand was far and away the favourite amongst teens polled in a recent semi-annual survey, for each clothing and footwear. What’s particularly noteworthy is that the gap between first and second is considerable. In footwear, Nike was the most well-liked brand with 59% of teens, with the subsequent closest brands having a mindshare of just 7%. In clothing, it was a bit closer, with Nike’s percentage coming in at 34% versus 6% for the second hottest brand.
While the corporate’s growth rate could also be showing signs of weakness, the brand stays strong, which suggests that it could just be the poor economic conditions weighing down the business versus problems with Nike’s overall brand.
Its low earnings multiple can arrange investors for gains down the road
Another excuse to contemplate buying the stock is that it looks really low-cost at once. At just 22 times its trailing earnings, Nike is trading at a much lower multiple than it has previously, and it’s well below its 10-year average.
The counterpoint, after all, is that growth investors aren’t going to wish to pay a premium for a business that is struggling to grow. In its most up-to-date earnings report, covering results until the top of May, Nike’s quarterly revenue totaled $12.6 billion — down 2% yr over yr. That is not the kind of stock investors are going to be wanting to pay 30 times earnings for at once.
But at its current multiple, the stock may very well be low-cost enough that it is sensible to speculate, anyway. The common stock on the S&P 500 trades at nearly 25 times its trailing earnings. And while Nike’s growth rate could also be negative today, that doesn’t suggest it’ll stay that way. As economic conditions improve and because the company launches latest products, the expansion rate could pick up.
Nike’s profit margin is solid
What’s promising is that even amid the present adversity out there, Nike’s profit margins remain strong at nearly 12% of revenue.
This is vital for 2 reasons. The primary is that a high profit margin may give the corporate room to supply discounts and cut prices to stimulate some growth, while ensuring it stays profitable in doing so. Second, a double-digit profit margin implies that once its growth rate does start to select up, a variety of that incremental revenue will lead to stronger earnings numbers, which, in turn, will potentially bring down Nike’s earnings multiples and make the apparel stock a greater buy in the method.
In case you’re patient, this could be a wonderful stock to purchase and hold
Previously, Nike’s stock didn’t seem like an excellent buy to me attributable to its elevated valuation. But now, at a rather more tenable price, the stock could make for a potentially solid investment for many who are willing to be patient and hang on for the long run.
There is probably not a fast turnaround for Nike’s business, and rather a lot will inevitably rely upon the strength of the economy, but I’m confident it will possibly get back to growing its sales. When that happens, its earnings numbers will improve, and it could seem like a bargain buy.
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David Jagielski has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Nike. The Motley Idiot has a disclosure policy.
3 Reasons Nike Stock Can Be a Great Long-Term Buy was originally published by The Motley Idiot