NKE is a BUY!!

I was not planning on making any moves as the weekend approached. Rather I was content to sit on my four open long positions (BRK.B, KMR, KO, CVS) and enjoy the weekend. But then I received an alert that NKE had broken $94.  It fell 10% overnight, between Thursday and Wednesday, on an earnings miss of 14.6% for Q4 and FY earnings results.  So here is a readout of my analysis and action.  Bottom line...I am glad this was on the watch list and that I know the company, because this is a great opportunity.


EPS Summary

• $25 million charge related to the restructuring of its business in Europe

• Increased spending on marketing by 23% QOQ (Olympics/NFL jersey contract/World Cup)

Revenue was up 12% to $6.5bn (missing projection - so what) and up 16% for the full year to $24.1bn, with increases across all product sectors with the U.S. market leading the way (not the greatest news). While there was revenue growth in China ($667mm) NKE sees growth moderating and will need to clear some inventory additional inventory from the region.

The real issue is that the gross margin declined by 1.5% in Q4 and 2.2% in the full year due to high product costs and investment in digital business. Net income declined by 8% largely due to the above one-time events.

Thesis

It is the first time since the last two years that NKE missed estimates. The company saw slowing growth in China in the last quarter, with orders coming in at 2%, which were expected to be somewhere in the range of 10%-15%. Overall, the announced results were disappointing weighing down on the company's stock. However, I maintain a positive outlook for the NKE as it has consistently shown growth in its earnings for a number of years, with strong revenue growth. It has also consistently beaten analysts' estimates in the past, which is why the current miss has come as a shock to many.  Moreover, one-off charges related to its European division and marketing costs related to the summer Olympics led to the recent decline in quarterly earnings. It has a strong business model with strong financials and a worldwide presence, and I expect it to do well going forward.  Despite the stock losing value in the past three months, it has outperformed over a one-year period. It currently trades close to its 52-week low of $77, which is a good entry point as the negative earnings results have been priced in.

Action and Forecast

I picked shares at $88.56 per share.  While this is not a trade, I do expect to see rebound by Monday (there was but not as big as I thought) with the stock likely trading up 3-5 points.  For the long-term, NKE is still the company that is was at the time of my last complete analysis (April).  It has ZERO debt, is the industry leader with a proven track record, and has some very positive events on the horizon (Olympics, World Cup, NFL Season as title jersey sponsor).  While I think that it will take 18-24 months for NKE to test its recent levels of $115, especially with global headwinds, I see this earnings release as a good opportunity to lock in a large margin of safety on the purchase of this company.