Nike Inc. (NKE) closes out the 2017 fiscal year tomorrow at 1:15 p.m. PT with its 4Q earnings report. Price movement following an earnings announcement can be pretty volatile, and so it’s important to know what the market is expecting. Here’s a closer look at analyst EPS estimates, historical price moves on earnings and option market expectations.
Analyst Estimates
Nike has a pretty good track record historically of beating analyst estimates on top-line revenue and bottom-line earnings. According to Reuters, Nike has beaten revenue estimates in all of the last five quarters by an average of 1.24%, and EPS has also surpassed estimates in the last five quarters by an average of 18.27%. According to Marketwatch, the mean estimate for 4Q is $0.50 with estimates ranging from $0.44 to $0.66 per share. Reuters analyst estimate for 5-year projected EPS growth is 10.89% and is down from 14.49% one year ago.
Earnings Price Gaps Last 4 Quarters
Whether trading an earnings report or making an investment decision on an earnings day, I find it helpful to know what type of gap is typical for a company following the announcement. For Nike, they are announcing after the market close on June 29. The first opportunity for the market to react during normal trading hours is at the open on June 30. Also, looking at the after-hours price following the earnings can give you a sense of market sentiment. Over the previous 4 quarters, Nike has an average price move of $1.63 from the close just before the earnings announcement to the next day’s opening price. All but one of the earnings moves were greater than 2%, and the largest gap was -5.6% for the most recent quarter announced on March 22.
Price gaps on last 4 quarterly earnings reports
Data Source: TD AmeritradeOption Market Expectations
A good rule of thumb for gauging option market expectations is by calculating the expected move. The expected move is the average price of the at-the-money straddle and strangle for the nearest term expiration that also incorporates the earnings date. For most actively traded companies that means you’re generally using a weekly expiration, and for Nike that means using the June 30 expiration. Typically, it’s best to look at these prices about 1-2 days before the announcement.
The straddle price is determined by taking the price of the call and put at the same strike price and is closest to the current stock price or at-the-money (ATM). The strangle price is determined by taking the first out-of-the-money (OTM) strike prices for the call and the put. The bid and ask prices are averaged to come up with a mid-price for the straddle and strangle. As of the morning of June 28, 2017 the prices for ATM straddle is $2.77 and the OTM strangle is $2.51. In the table below, the expected move is $2.64, and is calculated by taking the average of prices for the straddle and strangle.
NKE option market earnings expectations
Data Source: TD AmeritradeInterpreting the Data
Looking at the price gap information there hasn’t been a “typical” earnings move. The most recent announcement generated significantly more movement than the three previous announcements. The option market is currently pricing in movement that is much closer to what happened in March.
Since mid-May, Nike has experienced relatively large price gaps on May 16 and June 16, and has seen its 14-day Average True Range (ATR) increase about $0.18 to a more typical $0.90 (see chart below). As it has gotten knocked around it has hammered out some relatively significant support and resistance levels around $54.60 and $50.80. As trading opens up on June 30 it may be reasonable to project the price opening up somewhere in this range if the report comes in close to analyst projections. However, a significant positive or negative surprise can cause much more significant moves than one can predict.
