Tuesday, March 24, 2020

Will Nike Have a Good Run After Q3 Print?

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What’s happening: Nike is scheduled to report its third-quarter results after the closing bell on Tuesday, March 24.

What happened: The sports and apparel giant has reported earnings ahead of estimates in every quarter for the past two years. Nike had beaten both revenue and earnings estimates in its December release. Although the stock had initially declined on concerns over gross margins, it recovered quickly and hit a record high in January.

Since then, Nike’s shares have lost more than a third of their value, providing investors an attractive buying opportunity into a company with very strong fundamentals.

  • The consensus revenue estimate for the third quarter stands at $9.56 billion, representing a 0.5% year-on-year decline.
  • The estimate for earnings is 55 cents per share, a 19.1% decline versus from the same quarter in the previous year.

Why it matters:Despite some margin pressure due to stiff competition, Nike had been witnessing high demand and strong customer loyalty towards its brand. That was before the coronavirus hit the results of even the largest companies.

COVID-19 has become a major issue for Nike, with lockdowns and isolation likely to affect demand for sportswear and athleisure wear. Earlier this month, the company announced plans to shut all its stores in the US and some other countries to control the coronavirus. While stores will remain closed in Australia, Canada, New Zealand and Western Europe till March 27, Nike said stores in Japan, South Korea and most of China will stay open

Over the years, Nike has significantly expanded its ecommerce offerings and the company also benefits from a stronger US dollar. The company is likely to continue investing in Nike Direct and in its global operations. In fact, Bank of America upgraded their rating for Nike from Neutral to Buy on Monday, saying that the challenging environment could expand the company’s global market share.

While the long-term prospects remain strong, it is still to be seen how the coronavirus will impact the company’s business in the near- to mid-term.

What to watch:Shares of Nike had hit an all-time high of $105.62 in January. After the 32% decline over the past three months to trade closer to $62, Nike’s shares are much more attractive. The stock may try to close the gap if Nike reports strong results, as big moves have typically followed earnings. There may be investor concern, however, related to the near-term outlook.

Comments from management around the coronavirus impact and the company’s preparedness for the crisis could boost Nike’s shares.

The Markets Today

     

Investors will be watching European stocks today, ahead of the PMI reports due for release today.

Context: European shares started the week on a lower note, with coronavirus continuing to hit the region’s financial markets. The US Federal Reserve’s announcement to purchase an unlimited amount of securities failed to lift investor sentiment.

Details: Although various governments have announced massive packages to help their economies get through this tough phase, the US has not agreed on an economic stimulus plan yet. The stimulus bill failed to get through a procedural Senate vote on Sunday.

The pan-European Stoxx 600 index fell 4.4% on Monday, with travel-related stocks down around 7%. However, oil and gas shares rose slightly by 0.9% after the US Fed disclosed an asset purchase plan. The FTSE 100 closed 3.8% lower on Monday, while German 30 fell 2.1%.

Europe, the new epicentre of the coronavirus pandemic, is witnessing a sharp rise in confirmed cases. Total cases in Italy have surpassed 63,000 and the death toll has risen past 6,000. Spain has also confirmed more than 35,000 COVID-19 cases and around 2,300 deaths.

In corporate news, Royal Dutch Shell announced plans to lower its 2020 spending and suspended its share buyback program. Shares of British company IWG plunged 17% after the company announced plans of suspending its dividend and share buyback plan.

Why it matters: Investors are hoping for more positive announcements from their governments to help lift market sentiment. After a weak performance in Monday’s session, all eyes are on the manufacturing, services and composite PMIs reports from the Eurozone. Investors will also keep a close eye on PMI reports from France and Germany.

What to watch:The IHS Markit Eurozone Composite PMI is expected to drop to 38.8 in March, versus a reading of 51.6 for February. Services PMI is likely to decline to 39, from February’s reading of 52.6, while manufacturing PMI is projected to fall to 39, from 49.2 in February.

Other Markets:Most US indices closed lower on Monday, with the Dow, S&P 500 and Nasdaq down 3.04%, 2.93% and 0.27%, respectively.

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South Africa’s leading business cycle indicator, the French composite PMI, Germany’s composite PMI, the UK’s composite PMI and CBI industrial trends orders, Brazil’s retail sales as well as the US Redbook index, composite PMI, new home sales and Richmond Fed manufacturing index.