Nike Is Putting Its Best Foot Forward

 Wayne Duggan
  3rd-Aug-2018

The athletic apparel space has been a challenge for investors, but Morgan Stanley analyst Lauren Cassel says opportunities are opening for long-term investors. She prefers investing in brands rather than retailers and says Nike Inc (NYSE: NKE) is her top stock pick.

According to Cassel, athletic footwear has several tailwinds, including innovation-driven pricing power, a margin-boosting shift to direct-to-consumer sales and resilient brand strength. Cassel says Nike and Adidas maintain a near duopoly over the global footwear market when it comes to brand power.

Cassel estimates that active apparel and footwear will continue to rise in popularity, with activewear gaining about 2.5 percent of total global apparel and footwear market share over the next five years.

She says the shift to a direct-to-consumer sales model is good news for Nike and bad news for retailers such as Foot Locker (FL). Nike products currently make up more than two-thirds of Foot Locker's products, putting the company at risk of losing major business as Nike ramps up its direct-to-consumer sales.

"Nike's consumer-direct offense, led through its direct-to-consumer business, is set to ignite this next phase of margin-accretive revenue growth for the brand, driving our 17 percent four-year [earnings per share compound annual growth estimate] versus 5 percent over the past two years," Cassel says.

She says Nike is transitioning its entire business from a wholesale model to a retail technology model.

"Nike is positioned to take share in the high-growth, global activewear market as well as increase profitability, which should make it one of the highest growth consumer names and one of the few to benefit from the shift to e-commerce," she says.

She says Wall Street doesn't seem to fully appreciate Nike's opportunity, and Morgan Stanley's forward EPS estimates are between 1 and 2 percent higher than consensus predictions. In addition to the 17 percent average annual EPS growth forecast, Cassel says Nike should deliver 8 percent annual revenue growth and 15 percent annual operating profit growth over the next four years.

Morgan Stanley has an "overweight" rating and $88 price target for NKE stock.

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Category: Sports

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