Nike (NKE 0.20%) recently reported solid third-quarter earnings results. However, the market did not seem too excited, pressuring the stock by as much as 5% to around $75.20 per share. Nike's share price decline might be due to weak guidance offered for the fourth quarter of 2014 and full-year 2015. Let's examine whether Nike is a stock to buy now.
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Solid performance and ongoing share buybacks
In the third quarter, Nike's revenue experienced a significant jump of 13% to $7 billion. Results were driven by 14% currency-neutral revenue growth in the Nike brand and 16% currency-neutral revenue growth for Converse. Net income from continuing operation stepped by 3% to $685 million. Third-quarter diluted earnings per share came in at $0.76, 4% higher than year-ago results.
The EPS increase was also helped by ongoing share-repurchase activity. In the recent quarter, Nike spent $788 million to buy back 10.4 million shares. Thus, in a four-year, $8 billion share-repurchase program, Nike has retired 39.6 million shares for around $2.5 billion.
Negative currency exchange rates and a high valuation
What's worrying about Nike in the near future are weaker currencies in developing markets. The company estimated that the negative impact from currency exchange rates lowered its EPS growth by 6 percentage points for the third quarter and 9 percentage points year to date. Nike expects that negative currency exchange rates could be one major headwind to its overall growth rate in 2014 and 2015.
I personally think that Nike could continue to experience a declining stock price for the near term because of upcoming foreign exchange headwinds combined with a high valuation. At the current trading price, Nike is valued at nearly 22.2 times its forward earnings with the PEG ratio of 2.1.
Its smaller U.S. peers, including Foot Locker (FL +0.00%) and The Finish Line (FINL +0.00%), have much lower valuations. Foot Locker is the cheapest among the three at nearly 13 times forward earnings and a PEG ratio of 1.4; Finish Line is trading at 14.9 times forward earnings and a PEG ratio of 1.4. The two companies are also quite active in retiring their share counts.
In fiscal 2013, Foot Locker spent $229 million to repurchase 6.4 million shares, yielding nearly 3.4%. Including a dividend yield of 1.9%, Foot Locker offers a total cash return of nearly 5.3%. Finish Line repurchased $5.2 million worth of shares in the third quarter, leaving the company with 4.1 million shares remaining in the current share-buyback authorization. Moreover, Finish Line also offers investors a dividend yield of 1.1% with a conservative payout ratio of 21%.
Foolish takeaway
Nike, with its well-recognized global brand, will continue to deliver impressive operating results, and with its ongoing $8 billion share-repurchase program, Nike will continue to return cash to shareholders for the next several years. However, because of foreign exchange headwinds and the high valuation, I would wait for more of a stock price correction in the near future before establishing a long position.
