Don’t Do It? Nike Stock Looks Less Attractive Than These Two Alternatives

If you are a Nike (NYSE:NKE) investor and took advantage of the stock’s recent run-up over the past month, amid signs of an improvement in its business and the considerable exposure it received during the Paris Olympics, it may be time to look elsewhere. As of this moment, we find Autozone (NYSE:AZO) – a leading U.S.-based retailer and distributor of automotive parts – and EMCOR Group (NYSE:EME) – a provider of construction and facilities, building, and industrial services in the U.S. and U.K, – to be more attractive buys than Nike.

Why? Simply because the valuation and growth numbers tell us so. AutoZone and EMCOR stocks have both seen higher growth in revenue and operating profits than Nike in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Nike.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than NKE – AZO & EME Stocks

Specifically, to illustrate the opportunity for AutoZone, you pay $14.68 per dollar of earnings-before-interest-and taxes (EBIT) for AZO stock versus $20.21 for NKE, and get higher annual growth (5.0% vs 0.3%), higher quarterly growth (3.5% vs -1.7%), and better margin trend (1.1% vs 0.7%). Overall, you get higher revenue, and operating profit growth from AutoZone and EMCOR, and pay less than NKE stock. See our complete analysis of Better Bets Than NKE Stock

So What’s The Catch?

Now, could Nike buck the trend? Could it grow its revenues and profits faster than AutoZone or EMCOR in the coming quarters? Of course that’s possible. While Nike has been weighed down by macro pressures, uneven consumer trends, sluggish brick-and-mortar sales in China, and softer digital sales, there are many positives as well for the company. The recent top-line weakness has made the company undertake a multi-year plan to cut costs by $2 billion while axing certain underperforming product lines and laying off hundreds of people. Nike’s gross margins have also been expanding, rising 110 basis points to 44.6% in fiscal 2024, driven by a combination of lower freight costs and higher prices for some premium products – a testament to Nike’s relatively strong pricing power. Nike generates over $6 billion in free cash flow annually and this can allow the company to outspend the competition for sponsorships and advertising.

The data below shows both AutoZone and EMCOR outperformed Nike recently and over the last year. They might repeat this. Related Ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Nike, To Get More Revenue And Profit Growth?

While EME has seen the strongest revenue growth of the three both in the last twelve months and the last quarter, NKE has seen the slowest growth over the period. Moreover, NKE margins have seen less of an expansion versus peers over the last twelve months. However, despite this, MCD stock trades at a higher price-to-operating income ratio of almost 20x, compared to 15x for AZO and 16x for EME.

What About Relative Market Returns?

EME stock has shown a stronger market performance, with returns of  23.6% over the past 6 months, and 71.5% over the past 12 months. In comparison, NKE returns for the same periods were weaker at -19%, and -13%, respectively.

How Did These Metrics Look 1 Year Ago – Could NKE’s Combination Of Higher Valuation & Lower Growth Persist?

NKE still had a higher valuation of $28.67 vs $13.6 for AZO but higher annual growth (9.6% vs 8.2%), lower quarterly growth (4.8% vs 5.8%), and less favorable margin change (-2.7% vs -0.7%). The situation looks quite different now which means that market reward could switch in favor of AZO and EME.

Investment Thesis For AZE and EME

AutoZone is a leading player in the automotive aftermarket parts and accessories space. The company has grown at a relatively steady clip (average annual sales growth of 9% since 2018) and is viewed as being a defensive business, given that auto parts sales hold up during downturns as vehicle owners may opt for repairs and maintenance rather than buying new vehicles.  The company’s strong finances, its well-recognized brand, and its wide retail footprint put it in a strong competitive position versus its peers.

EMCOR, being a specialty contractor, serves a diverse set of customers, providing design, installation, operation, and maintenance solutions for advanced systems for data centers, EV plants, hospitals, and biotech projects. The company could stand to benefit from the trillion-dollar Infrastructure Investment and Jobs Act and the Inflation Reduction Act. The company’s order book remains strong, standing at record levels of about $9 billion, increasing about 8.6% compared to the year-ago period as of the last quarter, giving it good demand visibility. EMCOR’s balance sheet is also strong, with limited debt and a strong cash position.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/27/2024
[2] Cumulative total returns since the end of 2016

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