Cowen: Nike's Valuation Looks High Amid Unprecedented North American Competition

Nike Inc NKE shares were hit hard Wednesday after a sell-side analyst said the company's valuation feels rich after recently striking all-time highs.

The Analyst

Cowen analyst John Kernan maintained a Market Perform rating on Nike with a $81 price target.

The Thesis

Nike’s 30th anniversary of the "Just Do It" campaign that prominently featured Colin Kaepernick resonated strongly with 18-34-year-old men and Nike consumers that spend $300 or more annually, but it may have alienated Nike consumers earnings over $100,000 per year, Kernan said. (See his track record here.) 

Twenty-five percent of men and women in the high-income demographic said they were slightly less; significantly less; or will not buy Nike products any more, according to a Cowen Consumer Tracker Survey.

Among male respondents, 36 percent said their first choice of a replacement brand is adidas AG (ADR) ADDYY at 36 percent. With female respondents, the replacement brand of choice was Under Armour Inc UAA at 23 percent.

Still, Nike appears to be doubling down on its most loyal customers.

The apparel maker's recent acquisition of Zodiac is symbolic of the company’s strategy and focus on its most valuable customers in an era where the brand faces an unprecedented amount of competition in North America, Kernan said. 

Although 37 percent of the U.S. population has purchased Nike in the past year, Kernan said 75 percent of Nike’s growth in the next five years will be generated internationally. The analyst forecast that China will generate 45 percent of total company EBIT growth.

“While NKE is one of the highest and most consistent return-on-capital business we have ever studied, the stock is fairly rich,” the analyst said. 

“P/E expansion to 31x from 21x in the span of 12 months keeps us sidelined on Nike.”

Price Action

Nike shares were down 5.72 percent at $75.84 at the time of publication Wednesday. 

Related Links:

Lululemon Has Growth Opportunities In Men's, International, Wells Fargo Says In Upgrade

Analysts Upgrade Nike On $50B Revenue Potential, Direct-To-Consumer Growth

Photo courtesy of Nike.