Nike Inc (NKE: NYSE) hogged the limelight on Friday after Robert Ohmes, an analyst at Bank of America, upwardly revised the stock’s rating to ‘buy’ from ‘neutral,’ highlighting resilience in both apparel and footwear. Ironically, the company slashed the FY 2020 earnings estimates for Nike and also lowered the target price. The stock closed at $67.45, down $2.89 or 4.11% from the prior close. Nike stock has lost roughly 30% this year.
According to the analyst, a challenging business environment could enable the company to increase its market share because of its top-class sourcing capabilities. Ohmes also pointed to the company’s vertically integrated supply chain and reliable supplier base as other reasons for the likely improvement in performance during a challenging environment.
Ohmes said, “We believe NKE remains the key brand that wholesale customers shift orders to in times of distress and should also benefit from its superior sourcing capabilities, with a vertically integrated supply chain and more consolidated supplier base.”
Ohmes further opined that prevailing worldwide ‘athletic momentum’ fancies Nike in both apparel (driven by sportswear) and footwear (driven by Air Force 1 & Air Jordan 1 styles).
Despite the positive outlook, Ohmes slashed the Beaverton, Oregon-based company’s FY 2020 earnings by 50%, while forecasting a 46% decline in May quarter revenues. Specifically, the analyst predicts a $2 billion annual drop in North America and a $1 billion decrease in China, the Middle East, and Europe.
Based on the anticipated decline in earnings, the analysts downwardly revised the stock’s target price to $85, from $105 issued earlier. Even the downwardly revised target price reflects roughly a 25% premium to Friday’s closing price. Taking that into account, the analyst issued a ‘buy’ rating for the stock.
Nike is scheduled to report its fiscal 2020 third-quarter earnings on March 24th. So the shares could turn volatile as the company is anticipated to announce changes to its guidance due to the coronavirus outbreak.
Some analysts have raised valid concerns and do not accept that this is the best time to buy the shares of Nike.
Earlier last week, Nike revealed that it is temporarily closing stores in the US, Australia, Canada, New Zealand, and other Western European countries until March 27th as a precautionary measure against the coronavirus which has already spread to over 200,000 people across the globe. The latest setback to Nike is the deferring of the Euro 2020 soccer championship, scheduled to be held from this summer to next year.
Before COVID-19 started spreading outside of China, the company acknowledged that the scenario would have a “material impact” on its performance in the country. Now, the outbreak has been officially announced as a pandemic. Therefore, Nike is sure to lose considerable revenue due to the shutdown of its shops and the postponement of major sports events.
Considering both sides of the argument, we can understand that the shares of Nike may not see an upside immediately, but it will happen as normalcy returns. Until then, fundamentally, the stock is expected to remain range-bound with a bearish bias.
The historical price chart indicates that the stock has bounced off the support at 60 after a free fall earlier last week. The next resistance is anticipated near 85. Additionally, the stochastic oscillator is also in the oversold region. Therefore, we are expecting the stock to rally in the short-term.
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