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Lace-Up Your Nikes (NKE), The Stock Could Be Ready To Run

 November 27, 2012 03:30 PM
 


(By Rich Bieglmeier) iStock starred footwear while doing our weekly sector analysis. We put a little * next to the industry names that standout in our opinion. That way, we can double back and try to find candidates within our *ed favorite constituents lists.

While Wall Street appears to have made up its mind on the sector, they seem to be a bit uncertain regarding one of the biggest names, Nike Inc. (NKE).  The athletic apparel company has a technical lid around $98, right where the stock price is today.

Since hitting a cycle high in mid-September, each time the price has flirted with breaking $98; sellers took charge and knocked the stock down. The reason we believe traders are uncertain about NKE is because the range from top to bottom has expanded in all but the last drop. A triangle pattern with the point to the left, instead of the right, is apparent.

[Related -Lululemon Athletica inc. (LULU): Near-Term Risks Could Further Derail Investor Confidence]

It is called a right-angle broadening pattern and is considered a reversal set-up. The moves tend to be powerful once the street makes up its mind on which direction it wants to take the stock. Once either side of the triangle is broken, that's where the stock is likely headed in a big way.

However, if NKE fails to get beyond the top, trend-line of resistance, then it could travel to the bottom edge near $88, which would complete another triangle pattern. Even the technical outlook for the just do it company is uncertain, which triangle will be the winner.

[Related -Nike Inc. (NYSE:NKE) Q2 Earnings Preview: Just Doing It, Again]

Although we think the question will be answered before earnings are released on December 20th, the quarterly report will be the next event-driven stock price driver, followed by a 2 for 1 stock split in the form of a 100 percent stock dividend payable on December 24, 2012 to shareholders of record at the close of business December 10, 2012 – better hurry up.

Additionally, management announced a 17 percent increase in its quarterly cash dividend for outstanding Class A and Class B Common Stock.  The $0.21 per share dividend, on a post-split basis, is payable on December 26, 2012 to shareholders of record at the close of business on December 10, 2012 – better hurry up. It is the 11th year in a row that Nike raised its dividend.

It's been our experience that raising dividends and stock split announcements are solid precursors to better than expected earnings and above-average price performance. In fact, numerous studies have shown that 2 (or more) for 1 stock splits lead to "positive price reactions." Research done by David Ikenberry indicates "Shares of split stocks on average outperformed the market by 8% the following year and 12% over the next three years."

Heading into earnings, iStock's biggest concern is Nike's margins. Gross margins have been shrinking, albeit slightly as costs are rising at a faster pace than sales. Fortunately, marketing, or demand creation as Nike management calls it, has been one of the fastest growing expenses. The consumer goods company has a great track record of getting its message to the right people; so, an increase in marketing costs should translate into higher revenues.

Additionally, currency fluctuations have been a drag on earnings. A rising dollar impacted profits negatively in the1st quarter of fiscal 2013. The greenback has settled back since achieving a cycle high in November, but we can see the relatively stronger buck taking some off the bottom line in December.

Finally, swollen inventory hurt profits and the stock price two earnings announcements ago. In the first quarter, inventories went up less than 2% versus revenue growth of 9.66%.  This bodes well for another solid eps outing from the swoosh.

Overall, iStock believes Nike Inc. (NKE) could be on the verge of a nice run. With the company increasing shareholder value via a stock split and hiking the dividend, along with the potential for another bullish earnings surprise, a technical breakout could have plenty of wind at its back.

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