Why Nike Fell on a Great Report

On today's episode of Market Foolery, host Chris Hill and Motley Fool contributor Matt Koppenheffer go through a few of the market's biggest stories. Nike (NKE -1.46%) put up some solid numbers and trends in its most recent earnings report, and the market sold it off 1.5%. Possibly an overreaction, yes, but things aren't entirely sunshine and rainbows for the shoemaker's future, either.

Likewise, KB Home (KBH -2.35%) is down after reporting some pretty solid numbers. Could this be a buying opportunity for long-term investors?

Finally, Lyft joins the ranks of the soon-to-be public companies, with underwriting reportedly in the works. And why not? Just about every recent IPO has crushed the market. Why is that, anyway? Tune in to find out more.

A full transcript follows the video.

This video was recorded on Sept. 26, 2018.

Chris Hill: It's Wednesday, September 26th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio for the first time in a long time, because he's in town, Matt Koppenheffer.

Matt Koppenheffer: Hey, Chris!

Hill: How are you?

Koppenheffer: I am fantastic! It is great to be here!

Hill: You're looking good!

Koppenheffer: Thanks!

Hill: You always look good!

Koppenheffer: It's the beard, isn't it? 

Hill: It's not the beard. The beard looks fine, but you just --

Koppenheffer: If my wife's listening, she'll be happy you said that.

Hill: The beard's fine. It's just not why you look good. We've got earnings. We've got an upcoming IPO that we need to talk about. Let's start with Nike, though. First quarter revenue just under $10 billion. Profits were 15% higher than a year ago. Apparently, it just wasn't good enough for some people, because Nike shares down 1.5%.

Koppenheffer: You can't please everybody.

Hill: Apparently not.

Koppenheffer: They just want so much. I mean, it looked like a really good quarter. As far as beating expectations, as always, you're talking about a couple of pennies on the bottom line. Revenue just barely beat. But it's higher than people were expecting.

Across the world, Nike continues to perform well. Its digital operations are performing really well. As a runner, and you're a runner as well, one of the things that I really appreciate about Nike is when you think about business innovation, they're actually doing it. We just saw Eliud Kipchoge break the world marathon record. What shoes was he wearing?

Hill: Nikes.

Koppenheffer: Nikes. They are really pushing the envelope as far as actual innovation goes in shoes. One of the places that they talked about on the conference call that they've been falling a little bit further behind on is the intersection, as they call it, of sport and style. I think Adidas has been getting the jump on them there. But they are looking at that. But, like you said, not enough, right? 

Hill: [laughs] By the way down, down 1.5% today. If you're a shareholder, I shed no tears for you, the stock is up 55% over the past year.

Koppenheffer: Yeah, that's fair. But it's still surprising, if you're waking up and you're looking at Nike Beats, why is the stock down? Well, part of it, at least, I had to do a double take on this, if you adjust Nike's earnings over the past 12 months, because they had a higher tax rate due to the tax changes, it's trading at 46X earnings. Up 55% over the past year. This is a pretty healthy multiple. When you're looking at that kind of multiple, they came out and basically said, "Even though it's been a good start to the year, we're going to maintain full-year guidance." Part of that is currency fluctuations and uncertainty about all these trade things going on around the world. You're looking at a stock that, I don't think I'm out on a limb here saying it's a little bit expensive. You really want everything to be firing along, management to be saying, "It's excellent, we're expecting more, higher everything, all of the things." And it just wasn't that on the conference call.

Hill: I want to get to one aspect of this that you and I were talking about earlier today. That has to do with trade. But, one thing I do want to point out, you reminded me of this. We've talked about technology companies, Apple is probably the easiest example, that come out with a product. They come out with upgrades to that product. And at some point, that product either goes away, or some version of it goes away, and they create their own obsolescence. 

Nike is not alone in this, but it occurred to me that companies that are in the business of producing running shoes appear to have this tactic down quite nicely. I don't go through as many pair of running shoes in a year as you do, but I go through a few. I find a pair that I like, and I'm like, "I'm going to get them." Then, no, they don't make that anymore. They don't make that model anymore. To Nike's credit -- and Brooks, part of Berkshire Hathaway, but specifically, since we're talking about Nike -- to Nike's credit, they do a very good job, a very effective job, and if you're a shareholder, you have to be happy about this, of creating products that people like, and then tweaking them, upgrading them, and getting rid of them so you have to buy something else.

Koppenheffer: Yeah, that's fair. I've been tempted to upgrade to Nike products. There have actually been people that are doing studies on how much your marathon time could improve just by wearing Nike shoes, when you talk about the upgrades and the differences in the different shoes. Now, Adidas had the lead for a little bit. They came out with this BOOST technology, a midsole that was helping marathoners set new records and win races. But now Nike has pushed further ahead.

Hill: Well, and that guy, I mean, he broke the world record for the marathon. He shattered it. It was over a minute he beat it by, right? 

Koppenheffer: It was an impressive performance. 

Hill: Something we were talking about, and I think this came up on the Nike call. Maybe this speaks to why the stock is down ever so slightly today. A little bit of caution on the part of management with respect to the trade landscape. We saw that with Nike. We saw that with this survey that came out this week from the Business Roundtable, where nearly two-thirds of CEOs who were surveyed said essentially that they were scaling back their investment plans because of all of the trade talk, all of the talk of tariffs.

Koppenheffer: I was working overseas for the past three years. I was in Germany. I'm doing some stuff in the U.K. now. In the U.S., I don't think we really know what it's like to have regulations, [laughs] after working in some of these other countries in Europe. Now, we hear about what's going on with the NAFTA talks. Who knows how that's going to shake out? But, there's the potential that Canada wouldn't be a part of the next form of the NAFTA agreement.

Hill: We'll do a deal with Mexico, and then we'll do a separate deal with Canada.

Koppenheffer: Yeah. When you have those kind of patchworks -- right now, there is a fairly free flow of goods across this continent. That's a big deal. Similar to what you were just saying, in terms of the survey concerning CEOs, how they're investing, I saw a survey in the U.K. This was supply chain managers saying that 10%, one in 10, U.K. companies, is at risk of going bankrupt because of holdups in imports of 10 to 30 minutes at customs because of Brexit. 

Hill: Just the ripple effect of that?

Koppenheffer: Just the ripple effect of that. These managers have become so used to having very lean operations, simple inventories, not holding a lot of inventory, having effective, easy to manage supply chains. When you have these delays at customs and imports, that changes all of that math. Companies could actually go bankrupt from that. Even the companies that aren't thinking about going bankrupt -- this gets back to Nike here and their caution about the future -- you maybe want to keep more on hand, more inventory. You have to plan a little bit more for delays and extra costs. These things have big ripple effects. 

You see these easy headlines and it's like, "We're going to be tougher on Canada and win this trade negotiation." Well, let's pump the brakes on that. That can have really big impacts on businesses in the U.S. and all over the world. 

Hill: Let's move on to KB Home. Third quarter profits for KB Home came in higher than expected. Help me understand why this stock is down 5%. They looked good on profits. Their operating margins are getting better, not worse. This is not like Nike, which is up 55% over the past year. This is a stock that's down about 25% year to date. On the surface, this appears to be a good quarter from a not-expensive stock.

Koppenheffer: Part of this could be the mystery that is Mr. Market. What's even funnier about that is, I think it was up as much as 4% after the earnings announcement yesterday post-market. Now it's down big today. Part of that could be, everybody's looking at the Fed today, everybody's thinking about rising rates. Rising rates, not great for homebuilders because it raises the cost to buyers. That could be having something to do with it. There were concerns on the conference call about where we are in the cycle, and how that's going to be for KB.

Now, KB had a good response to that. They said, "Maybe we're later in the cycle. But inventory levels are still particularly low." They operate in the affordable part of the market. They said in some areas, it's two months of inventory, which is pretty darn low. So, they're not concerned about it. Obviously, the market a little bit more so.

In terms of cycles, though, I was looking at the KB earnings, and I was like, "OK, this is kind of interesting but not that interesting for a lot of the dozens of listeners." Maybe 11 of the dozens of listeners. Here's something that I found particularly interesting. We just "celebrated" the 10-year anniversary of the Lehman bankruptcy. We're thinking back on 2008, 2009. 

Hill: "Celebrated," in air quotes.

Koppenheffer: Big, big air quotes.

Hill: We marked it.

Koppenheffer: We did, we marked it with red. KB has recovered from the worst of that downturn. But over the past 12 months, including this past quarter, they're at about $4.5 billion in revenue, $4.5 billion in top line, and around $400 million in operating profit. Compared to 2006, they were at $9 billion in revenue, basically double in revenue in 2006, and $1 billion in operating profit. So, we're going back 12 years here. When we hear people talk about, "We've come so far from where we were in the crisis, and everything's overheated and gotten so crazy again," at least in the homebuilding space, we're still a pretty far cry from where it was then.

Hill: When you look at the stock, do you look at that and think it's cheap? It's a potential buying opportunity? Or do you think, you know what, there are enough things going on here that it's not a screaming buy?

Koppenheffer: I would be concerned, as the market seems to be, in terms of where we are in the economic cycle. This has been a long bull market. We have been at historically low interest rates. Interest rates are, in my opinion, hopefully, they're going up. If interest rates are going up, it means things are going right. But that's not really that great for homebuilders. If you're looking at home builders, if you're thinking about home builders, I would be looking at the specifics of what they're doing, how they're building their business, how they're developing. 

Frankly, some of what I hear out of KB, in terms of how they're focusing on the returns from their home building operations. They just did a partnership with Google to integrate Google Assistant through some of their communities, which is pretty cool. When you look at these kinds of operational things, that's what I'd be focusing on. I would want to own a well-run home builder who's thinking about how to create a business that's sustainable over the long-term, as opposed to, is the stock cheap right now, or, should I be worried at this part of the cycle.

Hill: As you indicated, the Fed meeting -- we're taping this before the Fed announcement this afternoon. We'll see by the time this episode posts, maybe interest rates will have risen even further.

Koppenheffer: 2%, 3%.

Hill: It's causing a lot of unpredictability when it comes to buying a home.

Lyft is getting closer to an IPO. Who can blame them? JPMorgan Chase is reportedly in talks to be the lead underwriter. That story came out this morning. Interesting to see the dynamics at play here among the investment banks. You have Goldman Sachs and Morgan Stanley essentially backing out of this process because of their relationship with Uber. We'll see. The latest reporting I saw on Lyft's IPO, this was a few weeks back, it was "Hey, Lyft is targeting an IPO in early 2019, March or April of 2019." When you see... today, it's Survey Monkey going public, and the stock up 60%.

Koppenheffer: Crazy!

Hill: Last week, it was Eventbrite, stock up 70% on its first day of trading. Do you think there are people at Lyft who are pounding the table saying, "We have to go public!"

Koppenheffer: "Now!"

Hill: "We have to go right now!"

Koppenheffer: [laughs] Yeah, there's no, process here. We just need to bring this to market. I couldn't blame anybody at Lyft or Uber for thinking that way. Especially because the IPO market was so lousy for so long. That was part of the reason why you had these unicorn companies becoming unicorns, getting so large in the private market. Who wanted to go into the public market when you were going to get an icy reception? And then, you have all this scrutiny that comes with being a public market company. That's changing. So far this year, I think we've seen close to $40 billion in IPO proceeds. That's up 65-70% from last year. The cold IPO market is rapidly becoming much, much hotter. You've got the companies, you've got their venture-backed sponsors, you've got -- not venture-backed sponsors. Because there's so much money in these unicorns, you've got folks like Fidelity and Baillie Gifford investing in them as private market companies. They're all pounding the table to get it out there. 

We were just talking about Nike trading at 45X earnings. This is a pretty good time to be coming into the market if you're looking to do an IPO. Whether it'll still be that in early 2019, we'll see.

Hill: I'm wondering, and it's my ignorance of the intricacies of the IPO process, but I'm wondering to what extent they can speed things up. 

Koppenheffer: It's a tough process.

Hill: Even if they said, "OK, we're going to pull every lever we can to speed this process up," does that get them public in 2018? Or does it just mean, "Oh, well, we moved it from March 2019 to the first week of February."

Koppenheffer: It'd be hard. It really depends on the business. A simpler, smaller business probably has a little bit easier path. When you have big investment banks working on it, maybe they can push it a little bit faster. But you still have to work with the SEC here. That's a big hurdle in the process. Basically, you're submitting all of these materials to the SEC, the SEC has to look it over, come back to you. When you think about the complexity of the businesses with Lyft and Uber, when you think about all the investors involved in Lyft and Uber, I imagine that's not going to be a short process. 

Hill: Two quick things before we wrap up. First, your brother Dave. Dave Koppenheffer.

Koppenheffer: Former Fool.

Hill: If you're listening, email me. I'm waiting on an email from Dave Koppenheffer, and I think he knows why. 

Second, speaking of running, we'll end on running. You are part of The Motley Fool's Ragnar Relay team.

Koppenheffer: I am, yes. First time. 

Hill: Really? The first time?

Koppenheffer: First time.

Hill: I thought you were part of the first team we had years ago. No?

Koppenheffer: No. Never done it.

Hill: For those unfamiliar, the Ragnar Relay is a 12-person relay race, usually in the neighborhood of 200 miles. It's your first time as part of the team. Not to put any pressure on you, but I believe the six times The Motley Fool has entered the Ragnar Relay, we've won whatever division we've been in.

Koppenheffer: The corporate division.

Hill: The corporate division.

Koppenheffer: There's a long, storied history.

Hill: It is. I think the last time you were on this podcast, you were either about to go run the Berlin Marathon or you had just run the Berlin Marathon. If memory serves, you ran that marathon in summer. I'm going to say somewhere in the neighborhood of two hours and 40 minutes.

Koppenheffer: Yeah! Good memory! Closer to two hours and 41 minutes, but I'll give you that. Wow, impressive!

Hill: [laughs] So, as someone who is part of The Motley Fool and not part of the team, I'm happy that you're on the relay team. I feel like you're going to bring something to the table.

Koppenheffer: I hope I bring fun to the table.

Hill: I hope you bring speed to the table. I don't give a damn about the fun that you bring to the table. I want you to bring speed to the table!

Koppenheffer: We've got a great team and I'm happy to be a part of it.

Hill: Good luck!

Koppenheffer: Thank you!

Hill: As always, people on the program they have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by the Iron Man, Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!