Baird analyst Jonathan Komp downgraded Nike (NKE) on Wednesday morning amid concern its high valuation may not be sustainable while upgrading Foot Locker (FL), one of its biggest vendors, noting the near-term fundamentals for the company "can continue to inflect positively" amid strong Nike same-store sales.
NIKE: Baird's Komp downgraded Nike to Neutral from Outperform and lowered his price target to $82 from $87, citing his concern that the company's high valuation may not be sustainable. In a research note to investors, Komp said that, while Nike has positives, including a favorable product cycle and digital strength that support top-line acceleration globally, with a "strong" pipeline into calendar 2018, he remains concerned about sustaining the current near-record high P/E premium, particularly with about 57% of sales outside North America. Komp said that while Nike was among the best relative performers in the 2007-2009 cycle downturn, he believes the current relative valuation multiple could prove "vulnerable," especially amid ongoing global macroeconomic volatility. Separately, HSBC upgraded Nike to Buy from Hold on Tuesday.
FOOT LOCKER: Meanwhile, Jonathan Komp upgraded Foot Locker to Outperform from Neutral and raised his price target to $65 from $60, telling investors that he views Foot Locker as a more attractive and reasonably priced way to play Nike's strong current product cycle. Komp said Foot Locker has performed well since removing his positive Fresh Pick designation in December and over the last year, driven by stabilizing fundamentals, particularly improved same-store sales. He believes Foot Locker is uniquely positioned to benefit from an improved footwear cycle and Retro Jordan business, and sees the potential for accelerating comps in the fourth quarter and fiscal 2019, supporting potential margin expansion following a cumulative decline of about 400 basis points in fiscal 2017-2018. Komp had designated Foot Locker a Fresh Pick in October as Nike's improving outlook increased his near-term conviction the company can deliver better same-store sales.
PRICE ACTION: In late morning trading, shares of Nike are fractionally higher to $76.92, while Foot Locker is up over 2% to $57.95.