Nike (NKE 0.66%) hasn't had the start to 2022 that it was hoping for. Production restraints and woes in China have hit the company's financials in recent quarters. As a result, shares of the athletic apparel juggernaut have sunk about 18% year to date, considerably more than the S&P 500, which has fallen about 6.6% over the same time frame.
Nike's latest stock price pullback has created a nice window of opportunity for investors to acquire stock in one of the world's premier companies at a discount. It's likely that the shares could continue to face downward pressure for the foreseeable future, but current headwinds are largely short-term in nature. As Nike ramps up its digital sales and China concerns eventually ease, the company is well equipped to generate great success in the coming years.
Image source: Nike.
The power of Nike is consistency
Don't ever underestimate the power of a brand. Nike's brand enables the retailer to consistently generate strong financials. Even during a stretch where it faces pandemic-related temporary factory shutdowns and concerns surrounding sales in China, the company continues to deliver for its shareholders. In its fiscal 2022 third quarter (which ended Feb. 28), Nike reported a top line of $10.9 billion and earnings of $0.87 a share, beating Wall Street's estimates by 3% and 21%, respectively.
The outperformance comes even after quarterly sales in China declined 8% year over year. Investors should be optimistic about Nike's future in Asia. Management indicated in its previous earnings call that it expects to see sequential improvement in Greater China in the fourth quarter. The company's subpar third-quarter China revenue was offset by robust digital sales, which increased 22% year over year, primarily led by 33% growth in North America.
Nike's third-quarter performance showcased the company's ability to navigate volatility and effectively manage headwinds. In a market bristling with uncertainty today, Nike offers investors reliability accompanied by solid upside potential.
Investors can expect another fruitful year out of Nike in fiscal 2022 (which ends May 31). The analysts consensus forecast calls for full-year revenue of $46.9 billion and EPS of $3.74, translating to 5% growth for both metrics. These may not seem like staggering results, but they are impressive given the company's 2021 comparables. Due to COVID-19 pains in 2020, fiscal 2021 (ended May 31, 2021) revenue and earnings increased by 19% and 92%, respectively. Hence, Nike's ability to increase both its top and bottom line this upcoming year would be a worthy accomplishment.
Nike has an increasingly attractive valuation
The company's most recent stock price pullback has sparked my attention. Nike is trading at 35 times earnings today, below the company's five-year average price-to-earnings (P/E) multiple of 43. It was trading above its historical average at the start of the year, but the P/E has quickly contracted, which leads me to believe that now is a good time to buy shares.
NKE P/E ratio. Data by YCharts.
Analysts are modeling Nike's EPS to reach $6.20 by fiscal 2025, meaning it is trading at just 22 times consensus estimates for that year. This seems awfully cheap for one of the world's most successful companies. It also reveals the beauty of long-term investing and how an extended time horizon can help us gain a better perspective on the value of share prices today.
Consider Nike stock at these levels
The company has all the tools available to maintain stable success over the long run, all while developing an extensive runway for growth. Investors should take notice amid its recent pullback: Nike is now trading below its five-year average P/E multiple and may continue lingering at these levels for a bit.
Nike grants investors a triple threat with sound financials, an attractive valuation, and an unrivaled brand image. That's what is drawing me to it today, and I think other investors should tune in as well.
