Option Trade - NIKE, Inc. (NKE)
Monday, July 02, 2012

*OPTION TRADE: Buy the NKE Oct 2012 92.500 call (NKE121020C00092500) at or under $3.20, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $5.50.

by Ian Harvey

July 02, 2012

Plenty tripped up Nike (NKE) last quarter. And concerns that the problems will linger aren’t easy to quickly dismiss. Nike’s margins shrank for the third consecutive quarter, amid a years-long narrowing. More troubling: Nike’s China futures, a measure of forthcoming orders, grew by only 2%, a considerable drop.

However, after the tumble, the stock is the cheapest it’s been in two years.

Nike Looks Amazingly Cheap After Earnings Stumble!

Shares of Nike dropped 12% to $85.10 Friday morning, after the sneaker-maker reported a rare miss in quarterly profit and sales. It had beaten analyst expectations for 22 of the past 23 quarters. The shares ranged from $85.10 to $90.50 for the day finally settling at $87.78.

In little more than a year, the stock touched an all-time high, at $114.81, as well as deep lows, at $76.98.

It trades at 17 times trailing earnings. Nike last fetched that multiple back in March 2010. The stock’s juiced premium is gone, after trading for some 25 times earnings at those record highs.

With its new multiple, the stock is more in-line with earnings growth. Analysts see earnings per share rising 15% in fiscal 2013, after a lackluster 8% growth in 2012. This means that the stock pullback has brought down Nike’s P/E multiple, which I believe is a good level for the current EPS growth outlook.

Nonetheless, analysts afford Nike a bit of running room, noting its strong market position and the wide moat fortified by its brand. It offers investors one of the best ways to tap into expanding consumer shopping abroad, even if that spending is slowing.

And where else can an investor turn for growth? Under Armour and Lululemon are often lumped into this category. All those stocks look expensive, though, compared to Nike. Granted, Nike is still more expensive than Deckers Outdoors and Adidas.

Next month’s Olympics and the recently completed European Football Championship are widely viewed as upside catalysts for the company. Analysts expect those great feats, broadcast live on television, might inspire armchair athletes to lace-up new pairs of Nike sneakers or to buy a new jersey emblazoned with the same swoosh as their favorite athlete.

Benchmark Co. analysts reiterated their "Buy" rating and $122 price target on the stock.

Even those bearish on the stock right now tend to like the company’s story. “We remain positive on the longer-term prospects for the company and believe Nike’s brands are very well positioned to weather what is likely to continue to be a choppy global consumer environment,” says Sara Hasan, a McAdams Wright Ragen analyst.

In short, Nike can sprint higher, despite short-term challenges.

Therefore, in my view, the selloff only makes the stock more attractive as this is a company that continues to hit on all cylinders with multiple growth drivers.

With Nike's continued innovation, like the new FlyKnit lightweight shoes, Nike+ FuelBand, training software and other gear as examples of the company's strong lineup, as well as the addition of the Rio World Cup in 2014 and the Rio Olympics in 2016, Nike's standing will be boosted again!

Therefore, I recommend the following play:-

*OPTION TRADE: Buy the NKE Oct 2012 92.500 call (NKE121020C00092500) at or under $3.20, good for the day. Place a protective stop limit at $1.40 and a pre-determined sell at $5.50.


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