Many U.S.-based global megacaps will be hit hard if the U.S.-China trade dispute turns into a full-blown war. Chipmakers such as NVIDIA (NASDAQ:NVDA), Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) are likely to be first in the line of fire, but they won't be the only China-exposed stocks hurt in the hostilities.
The sportswear giant, Nike Inc. (NYSE:NKE) is one such consumer stock, vulnerable in a trade conflict between the two largest economies in the world. And the company is already being punished by the lingering dispute, with concerns mounting that rising tariffs on its imports from China will threaten its brand and reduce its sales.
After surging to a record high of $90 a share last month, Nike stock has fallen about 7% since the U.S. and China imposed tit-for-tat tariffs on each other’s imports, escalating their fight to a new level. While the shares are still up around 18% on 12 months ago, they dropped for the third consecutive session yesterday, to close down 0.6% at $82.16.
But if we dig a little deeper, it becomes apparent that the risks to the world’s largest sports apparel company aren’t actually that great. Nike has been consistently diversifying its production away from China — a strategy that's made it less exposed to trade tariffs on Chinese imports. For example, a decade ago, China was its main footwear producer. Today, Vietnam owns that title. When you combine apparel and footwear, Nike made about one-quarter of its products in China in 2018.
Another way to look at Nike’s relative strength in this dispute is the breakdown of the company’s 2018 revenue. Of more than $36 billion, the majority — almost $20 billion — came from overseas where Trump’s tariffs don’t matter. That being said, Nike and other brands which rely on China to different degrees, will still feel the pinch, and will mostly likely pass on their cost increases to consumers. But that setback, in our view, isn’t big enough to turn bearish on Nike stock.
Nike’s Strength Beyond China
Beyond this short-term negativity that’s hitting some rock-solid consumer stocks, Nike has many tailwinds supporting the strength in its share price. Its earnings have been strong, its brand remains the most powerful in the sporting world, and its digital transformation is creating new momentum.
Nike Inc. has topped quarterly earnings estimates 93% of the time over the past 11 years, supporting a stock rally that’s more than tripled the market since 2008, according to Bloomberg data. In the forefront of this great upside is the company’s “Triple Double Strategy,” which means doubling its resources on its digital properties, accelerating innovation and product creation, and deepening one-to-one connections.
The result of these efforts is that Nike is grabbing a greater market share from its main European rival, Adidas (OTC:ADDYY), even in its home market, while outperforming in the major growth markets of Asia.
In the last quarter, Nike sales rose 7%, or 11% excluding currency swings. Revenue in the Greater China market posted robust 19% year-over-year growth. The online revenues, the major battleground for all retailers, grew 36% year-over-year and reached $1 billion for the first time ever.
Bottom Line
Nike is one name that we strongly recommend if you see the current share price weakness accelerating on China trade fears. In a worsening economic environment, it will be tough to expect similar gains to those seen from the shares during the past decade, but it is a solid dividend-paying stock that you could stash in your long-term portfolio and earn a growing income stream without too much worrying about the daily volatility.