The Bullish and Bearish Case for Nike in 2014

Nike was added to the DJIA late in the year, so only a part of its gains were shown in the DJIA gains. With a $70 billion market cap, Nike was actually flat in December and up almost 9% in the final quarter.

There are many macroeconomic factors to consider in Nike. Most Wall Street strategists are forecasting higher price targets for the S&P 500 and the DJIA, and the hope is that this rising tide will lift Nike as well. The Federal Reserve’s gradual end to quantitative easing is expected to create a gradual rise in rates, so the rate story is not likely to crush the sports apparel maker.

Nike has large exposure to international growth markets. The world markets are exiting their recessions in Europe and much of Asia, and U.S. gross domestic product is expected to rise as well.

The stock closed out 2013 at $78.64, and its current dividend yield for 2014 is only about 1.2%. This dividend can keep rising through time, as can Nike’s stock buyback ambitions. The consensus analyst price target is $81.64, so analysts are only looking for about a 5% total return.

Nike shares hit an all-time high just above $80 and its chart continues to look good. A problem is that Nike trades at just over 25 times expected fiscal 2014 earnings (ending in May). Its expected 16% earnings growth the following year still gives it an earnings multiple of 22 times expected 2015 earnings, but we would caution that this is now almost 18 months out.

Another ongoing issue for multinational companies is that they are having a hard time getting capital back into the United States due to tax penalties.

In order to get aggressive on Nike, we think it will require a company misstep or a market correction. This stock rarely pulls back 10%, but that might be enough to entice new buyers to come into the stock. That being said, Citigroup has a street-high target of $90 for Nike.