UPDATE: Seaport Global Securities Downgrades Nike (NKE) to Neutral, 'we don’t believe NKE’s relative multiple is justified'
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Seaport Global Securities analyst Mitch Kummetz downgraded Nike (NYSE: NKE) from Buy to Neutral.
The analyst comments "We are lowering our rating from Buy to Neutral. The first thing to note is that this downgrade is not a call on the quarter or guidance. Instead, it reflects our broader view that there’s a disconnect between sentiment and reality. Sentiment isn’t exactly great, seeing how NKE’s shares are down 39% from their 52-week high, but that’s actually better than the company’s average peer, which is down 46% on average. Also, given NKE’s sell off, the stock is trading at a forward cash-adjusted P/E multiple of 23.2x, down from its five-year average of 30.5x, but NKE’s peer group is now trading at 11.5x, down from 22.0x. In short, sentiment isn’t great for the group, as these apparel/footwear vendors have sold off on a tough macro, namely supply chain disruption and rising inflation. As it relates to these macro issues, we don’t have a strong opinion as to whether the market is properly discounting their impact or not, so this has little bearing on our downgrade. Instead, our downgrade is based on how we see NKE’s set up relative to the sector, as despite NKE’s sell off, the stock is trading at a relative multiple (to its peer group) of 2.02x, which is up from its five-year average of 1.43x. This is where we think the disconnect resides. We don’t believe an above-normal premium valuation is currently justified for three main reasons. First, we believe consumer demand has shifted from athletic to non-athletic, which is a less-than-optimal backdrop for NKE. Second, we believe that demand has slipped for some of NKE’s key franchises, which could weigh on the performance of some of its bigger categories. Third, while we believe NKE’s wholesale distribution rationalization has its merits, it is leaving a void with some retailers, namely FL, which could provide some of NKE’s competitors with a platform to gain relevance and take market share."
Shares of Nike closed at $108.68 yesterday.
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