Nike (NKE +0.68%) has begun a new fiscal year, and its first-quarter numbers are set to come out on Oct. 1. The company has been facing some considerable challenges in recent years in growing its business, with CEO Elliott Hill leading the company for nearly two years, in an attempt to turn things around.
However, the apparel company is heading into earnings going up against some weak prior-year comparables and a low valuation. Could it be an opportune time to buy Nike's stock before its earnings come out?
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Nike's stock has often fallen after earnings
Buying a stock with earnings on deck can be a risky proposition. Unless there's a convincing reason to believe that the business may do better than expected, it can be a bit of a coin toss. Not only do the actual quarterly results matter and whether the company beat expectations or not, but investors will also be looking at the guidance to see whether it indicates stronger results ahead.
Unfortunately, in Nike's case, investors who have bought the stock heading into earnings have oftentimes seen it fall afterwards -- in some cases, significantly. The chart below looks at the stock's decline over the past three years, with the biggest drops typically coming after poor earnings reports.
However, it's also important to remember that the past doesn't predict the future. The benefit Nike may have going into its upcoming earnings report is that with the business struggling in recent years, it may be able to deliver stronger growth; the bar may not be all that high for the company to impress investors who likely already have a fairly bearish outlook on the stock.
Investors shouldn't expect a big surprise or turnaround anytime soon
Nike's stock has lost around half its value over the past 12 months. It may be an intriguing option to buy with its reduced valuation, but with the company's earnings deteriorating in recent years, it's still not all cheap of a buy -- it's trading at 21 times its estimated future earnings (based on analyst expectations). The average stock on the S&P 500 trades at 20 times its projected future profits.
NYSE: NKE
Key Data Points
I wouldn't rush to buy Nike's stock until there's more of a reason to be bullish on its turnaround efforts, which, for now, have been underwhelming. Even if it is able to generate some decent growth in its upcoming quarter, the market may still be looking for more convincing evidence that the business is on the right track. For now, a wait-and-see approach still makes the most sense for Nike's stock.
