Reality At Nike Not As Grim As The Bears Have Suggested; HSBC Upgrades To Buy

HSBC upgraded shares of Nike Inc NKE to Buy from Hold, saying the reality isn't that grim. In fact, the brokerage said Nike could be a good stock for 2017 and beyond.

Investors have become cautious on Nike due to concerns that the company is losing share to Under Armour Inc UA in basketball to adidas AG (ADR) ADDYY in lifestyle. Further, Nike has had to deal with excess inventory that should weigh on its second quarter, which will be reported on December 20.

“Besides, visibility on mid- to high single-digit reported sales growth and limited margin compression we feel is very high for this year and beyond, and these are not exactly metrics to be ashamed of,” analyst Erwan Rambourg wrote in a note.

Rambourg noted that though alternative brands may be gaining share at times, Nike is set for superior growth and returns long term, with several margin driving levers to pull during lower growth times like now.

On the valuation front, the analyst now sees the stock trading below 20x forward PE, a level “we find very compelling given our bullish stance on the fundamentals of the sporting goods industry and the quality of Nike’s management team and track record in terms of growth, cash returns and communication.”

For the second quarter, Rambourg expects EPS of $0.41, and sales of $8.055 billion, below consensus estimate of $0.43/$8.108 billion.

The analyst increased his target price to $60 from $56.

At last check, shares of Nike rose 3.25 percent to $52.10.