Second-quarter trends at Nike Inc (NKE.N) are better than expected, and the No. 1 player in the athletic shoe and clothing market is seeing strong orders at key global markets, UBS said, upgrading the stock to “buy” from “neutral.”
Shares of the Beaverton, Oregon-based company were up 3 percent at $90.35, their highest ever, on Monday on the New York Stock Exchange.
Nike is benefiting from solid sneaker sales in the United States, growing demand for apparel, signs of significantly accelerating Western European and Chinese sales, the brokerage said.
“China represents about 10 percent of Nike’s total revenues today, and we believe Nike is focusing resources to double its China revenues over the next five years,” analyst Michael Binetti wrote in a note.
When Nike reported first-quarter results in September, the company said orders were strong, but warned of potential “turbulence” ahead. [ID:nN23213576]
In November, German rival Adidas (ADSGn.DE) said it planned to outgrow Nike and looked to grow sales to 17 billion euros ($24 billion) by 2015. [ID:nLDE6A70B8]
Nike’s $4.1 billion net cash balance and global investment opportunities could drive double-digit earnings growth over the next three years, analyst Binetti said .
Nike recorded sales of $19 billion in its year to May 2010, though it is aiming to reach $27 billion by 2015. This means it would still be ahead of Adidas if both met their targets.
Rising earnings-per-share estimates and the brokerage’s outlook for sustained double-digit orders growth should be catalysts for the stock, the analyst said.
“Sustained double-digits futures growth has historically supported a premium P/E valuation for Nike shares, giving us comfort that Nike’s stock will continue to outperform the peer group,” the analyst said.
Nike’s shift towards toward increased revenues from high-margin businesses in China, emerging markets and the global apparel segment should also help push margins, said Binetti, who sees results from investments in domestic retailers.
“We estimate that investments with U.S. retailers are generating returns well above Nike’s corporate return on invested capital and … should drive outperformance versus the S&P in coming years,” the analyst wrote.
