Imagine you're Nike
- Fourth-quarter earnings increase 15% to $349.5 million, or $1.30 per diluted share.
- Fourth-quarter revenues climb 7% to $43.7 billion.
- Fiscal-year earnings soar 28% to $1.2 billion, or $4.48 per diluted share.
- Fiscal-year revenues increase 12% to $13.7 billion.
- Worldwide futures orders increase 9.5%.
- All regions post record revenues and profits.
However, along with those results, you happen to mention that while fiscal 2006 revenue growth is still expected to be in the high single digits, first-quarter revenue growth will be toward the low end of its range of 7% to 9%. You then watch your stock fall 4%.
This seems to be a classic case of investors having unrealistically high expectations. Nike topped the average analyst estimate and showed strength literally across the board, but investors still want more. The fact that investors were disappointed by the mention that it may come in at the low end of its revenue guidance for the first quarter seems to imply that people were expecting Nike to raise its earlier estimates.
Nike seems to have all the ingredients investors look for in a potential investment. It's known across the globe, it's something you're likely familiar with (buy what you know), and it just took a little beating despite great results. So, what's the catch?
The main issue I see is that it has raised expectations so dramatically. If it doesn't blow away expectations (and even when it does), its stock suffers. As David Meier mentioned last quarter, Nike has enjoyed a remarkable run over the past several years. Investors may question how long the good times can continue. While I'd hardly call it cheap with a forward price-to-earnings ratio (P/E) at 17, it seems to be fairly reasonably priced, based upon its growth.
Nike is clearly one of the most recognized brands in the world, ranking right up there with McDonald's
Fool contributor Mike Cianciolo isn't on Nike's payroll and has no financial position in any of the companies mentioned in this article -- yet.