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Nike Continues To Build A Moat Around Its Brand

NKE | September 13, 2016

Shares of Nike Inc (NYSE: NKE) have lost around 10 percent since the start of 2016 and are nearly flat compared to the same time period a year ago. The stock's underperformance isn't deterring John Kernan of Cowen and Company from reiterated an Outperform rating and $63 price target.

In a research report on Tuesday, Kernan suggested that Nike's stock direction heading forward will likely be determined by the company's gross margin and futures movement when the company reports its first quarter results on September 27.

As a reminder, Nike already guided its first-quarter margins to decline by 100 basis points due to foreign exchange woes. However, the analyst believes the guidance to be conservative, as a 100 basis point decline implies the largest contraction since May 2012.

Kernan is estimating Nike's constant currency worldwide futures to be +9 percent in the first quarter, which marks a deceleration from last quarter's 11 percent gain. The analyst noted that Nike's Brand Global Futures typically accelerates in Olympic years, but futures results by region tend to be "erratic" with a deceleration following the games.

Kernan also added that Nike's fiscal 2017 guidance will like remain unchanged and sales growth will come at a high single digit rate and gross margin will expand 30 to 50 basis points. The analyst is also expecting a low-teen earnings per share growth.

Kernan also noted that Nike's stock is trading at a 23x multiple on his fiscal 2017 earnings per share estimate, which is below its three-year historical average of 25x and also trading at 20x his fiscal 2018 earnings per share estimate. As such, the stock now "looks cheaper on a relative basis versus its historical valuation."

Bottom line, Nike remains the "preferred" brand across all ages, income levels and genders as the company "continues to build a moat around its brand" through category offense, innovation and creating digital connections with consumers.

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