Nike Analyst: 'We Prefer To Be Patient For A Better Entry Point'

Nike Inc NKE delivered a solid second-quarter earnings beat Thursday, but continued weakness in North America and potential fallout from tax reform have one analyst lowering his price target on the world’s biggest sportswear company.

The Expert

Camilo Lyon of Canaccord Genuity maintained a Hold on Nike and lowered the price target from $64 to $62.

The Thesis

Nike's ‘Triple Double’ strategy is starting to take hold, but the industry as a whole has remained highly promotional and may remain so until 2019, Lyon said. (See the analyst's track record here.)

“While Nike is bringing meaningful innovation to market in late Q3, the scale and volume needed to create a healthier marketplace may not be sufficient until [fiscal 2019],” said Lyon.

Tax reform may actually be a headwind for Nike, with the analyst estimating that Nike’s effective annual tax rate will increase to around 22 percent, up from the 14-16 percent the company guided pre-tax reform. Nike said it expects this to be positive over the long term due to the benefits of repatriation of cash and other potential deductions.

“Overall, we believe the outlook for NKE is improving, but the pace of improvement appears to be weighted to [fiscal 2019], and tax reform is an incremental headwind to earnings,” Lyon said. “We prefer to be patient for a better entry point."

Strong International Business

North America has long been Nike’s playground, but recent weakness in the region is offsetting growth from other geographies and causing concern for a typically surefire bet.

Europe, Middle East and Africa and greater China remain strong points for Nike's growth, delivering 19-percent and 16-percent growth, respectively, in the quarter, but were dragged down by North America’s 4.5-percent decline.

“In order to win the world, sneaker brands must win the U.S.,” said footwear analyst Matt Powell of NPD Group.