Option Trade 
Nike Inc (NYSE:NKE) Calls 
Monday, March 21, 2016

**OPTION TRADE: Buy the NKE Jul 2016 65.000 call (NKE160715C00065000) at approximately $2.60. Place a pre-determined sell at $5.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

by Ian Harvey

March 21, 2016

Nike Inc (NYSE: NKE), a seller of athletic footwear and athletic apparel worldwide, will report fiscal Q3 results after the market close tomorrow, March 22nd, with analysts expecting the company to post revenues of $8.9 billion and earnings of $0.49 per share, compared to revenues of $7.46 billion and earnings of $0.45 for the same quarter of last year. Nike trended lower after a second-quarter revenue miss, but the stock is once again trending higher, and is currently break-even for the year.

Nike has a solid earnings track record. The company has not missed its quarterly earnings estimate since June 2012, but revenue will remain a problem given the impact of the strong dollar on its international business. The good news for the company is that Wall Street already factored in last quarter’s revenue miss, and has braced itself for another challenging quarter for revenue. Nike has been a top performer over recent years, and Wall Street analysts remain very bullish on the stock. The valuation remains OK, with a P/E of 30.6, and forecast earnings growth of 16.2% this year and 15.3% next year.

Shares of Nike have a 50-day moving average is $60.11 and its 200-day moving average is $61.71. Nike has a 12-month low of $47.25 and a 12-month high of $68.19. The firm has a market capitalization of $107.28 billion and a P/E ratio of 30.59.

Nike last posted its quarterly earnings results on Tuesday, December 22nd. The footwear maker reported $0.90 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.86 by $0.04. The firm earned $7.69 billion during the quarter. The firm’s revenue was up 4.1% compared to the same quarter last year. During the same quarter last year, the company posted $0.74 EPS. On average, analysts predict that Nike will post $2.15 earnings per share for the current fiscal year.

For this quarter, analysts predict only 13% growth due to FX headwinds. Still, this number reflects healthy future order levels and indicates demand growth. Related, future orders are expected to include Olympic products. Despite rising competition from the likes of Under Armour and Adidas, Nike still has over 60% U.S. market share in athletic footwear.

Although SG&A is expected to grow due to investments in digital commerce and major events including the Super Bowl and NBA All-Star game, management’s cost cutting measures combined with efficient pricing should lead to favorable gross margin for the quarter.

Why Nike?

1. Besides having dominance in the sports apparel and footwear industry Nike also has good earnings growth.
Nike has a solid track record when it comes to earnings beats. In the past calendar year, the company beat Wall Street’s earnings estimates in all four quarters. The series of earnings beats led to an impressive bull run in Nike stock. In 2015, Nike’s stock price surged 31.2%, from $45.75 to $62.34.

2. In the most recent fiscal quarter, the company expanded its gross margin by 50 basis points to 45.6%. The higher average selling prices of Nike’s products helped to boost margins despite the negative impact from exchange rate fluctuations.
At the same time, the company’s tax rate has declined. In the quarter, Nike decreased its effective tax rate to 19.4%, significantly lower than the 25.4% tax rate in the year-ago period.
Improved margins and a lower tax rate allowed Nike to grow its earnings faster than revenue. In the quarter, the company’s revenue grew 12% year-over-year on a constant currency basis. Earnings per share surged a more impressive 22% year-over-year to $0.90.

3. Compared to other companies in the sports apparel business, Nike has done a great job in terms of returning value to shareholders. In the past 14 years, Nike has returned more than $23.0 billion to shareholders thorough stock buybacks and dividends.

4. The company is currently pursuing an $8.0-billion share repurchase program, which is expected to be completed by the end of fiscal 2016.

5. Nike’s board has approved a new four-year, $12.0-billion stock buyback program. It will start upon completion of the current program.

6. Nike has also raised its quarterly cash dividend to $0.16 per share (after the split). On an annualized basis, that’s a dividend yield of 1.04%. Note that the company has been growing its annual dividend rate since 2004.

7. Quarterly revenue in Greater China increased 24% year-over-year (28% excluding currency effects), making it the fastest growing division. Footwear, apparel, and equipment all increased (30%, 15%, and 10%, respectively), and it would not surprise me if China overtakes emerging markets in the upcoming quarter and Western Europe shortly after that.

8. Japan is small in terms of revenue ($205 million in the second quarter) and earnings before interest and taxes ($47 million), but both past performance and future orders point to Japan as becoming a more important part of the Nike machine. In the six months ended Nov. 30, Japan grew year-over-year EBIT by 108%, while no other region increased more than 38%. The next few quarters will tell us if this growth rate is a trend or a fluke.

Vanguard Group Inc. boosted its position in Nike by 102.6% in the fourth quarter. Vanguard Group Inc. now owns 85,903,718 shares of the footwear maker’s stock worth $5,368,982,000 after buying an additional 43,496,925 shares during the period.

A number of other large investors also recently made changes to their positions in KR, such as:-

• Price T Rowe Associates Inc. MD boosted its position in Nike by 132.2% in the fourth quarter. Price T Rowe Associates Inc. MD now owns 31,756,682 shares of the footwear maker’s stock worth $1,984,793,000 after buying an additional 18,083,134 shares during the period.
• Jennison Associates LLC boosted its position in Nike by 92.6% in the fourth quarter. Jennison Associates LLC now owns 32,071,004 shares of the footwear maker’s stock worth $2,004,438,000 after buying an additional 15,421,544 shares during the period.
• Capital World Investors boosted its position in Nike by 84.8% in the fourth quarter. Capital World Investors now owns 19,689,015 shares of the footwear maker’s stock worth $1,230,563,000 after buying an additional 9,035,370 shares during the period.
• Finally, Norges Bank acquired a new position in Nike during the fourth quarter worth approximately $549,385,000.

Sterne Agee CRT reissued their buy rating on shares of Nike Inc in a report issued on Sunday. They currently have a $75.00 price objective on the footwear maker’s stock.

Also, several other equities research analysts have recently commented on the company.

• Morgan Stanley reiterated a buy rating on shares of Nike.
• Cowen and Company reiterated a buy rating on shares of Nike.
• B. Riley reiterated a buy rating on shares of Nike.
• Vetr upgraded Nike from a buy rating to a strong-buy rating.

• Finally, Citigroup Inc. restated a buy rating on shares of Nike.

Three analysts have rated the stock with a sell rating, four have issued a hold rating and twenty-seven have assigned a buy rating to the stock. Nike currently has a consensus rating of Buy and a consensus target price of $76.77.

Harvey’s Options Volatility Indicator


Expect Nike to maintain its track record and deliver another earnings beat, which means there could be another surge in Nike stock.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the NKE Jul 2016 65.000 call (NKE160715C00065000) at approximately $2.60. Place a pre-determined sell at $5.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

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