Nike Stock After a Revenue Miss: What the Drop Does to P/E and Yield

You own 30 shares of a big sneaker-and-apparel company. Overnight it reports revenue below what analysts expected, and the stock opens 8% lower. Does the stock now look cheaper? Sometimes. A lower price pushes the P/E down and the yields up only if earnings expectations stay put, and after a revenue miss they usually don’t.

That’s the whole puzzle, and the arithmetic below settles it. Every company figure here is an invented round number for a Nike-like business. None of it is Nike’s reported data.

Key points

• An 8% drop from $100 to $92 cuts a trailing P/E from 27.78 to 25.56 if trailing earnings of $3.60 per share don’t change.
• The same drop raises the dividend yield from 1.40% to 1.52% on an unchanged $1.40 annual dividend.
• If analysts cut next year’s earnings estimate from $3.90 to $3.50 (a 10.3% cut), the forward P/E rises from 25.64 to 26.29 even though the price fell.
• A revenue miss of 3.3% on a quarter can wipe roughly 34 cents off annual earnings per share under the stated assumptions, close to most of that 40-cent cut.
• The price would need to fall about 10.3%, to roughly $89.74, to leave the forward P/E where it started.

The situation we’ll follow

Your name is Dana. Last spring you bought 30 shares at $100. That’s $3,000 invested. The company earned $3.60 per share over the last twelve months and pays $1.40 per share in dividends each year. Analysts expected $3.90 per share over the next twelve months.

Then the quarterly report lands. Revenue comes in at $11.6 billion against an expected $12.0 billion, with the shortfall attributed to weak sales in one large region. The stock drops 8% at the open.

Your position is now worth 30 × $92 = $2,760. On paper you’re down $240. Your annual dividend income is still 30 × $1.40 = $42. The price fell, the cheque didn’t.

How does a price drop change the P/E ratio?

Divide price by earnings per share. The P/E is just the price you pay for each dollar of annual profit.

Before the drop, the trailing P/E was $100 ÷ $3.60 = 27.78. After it, with trailing earnings unchanged, it’s $92 ÷ $3.60 = 25.56. You’re paying $2.22 less per dollar of last year’s profit.

Why is trailing earnings unchanged? Because it’s history. A quarter of weaker sales will eventually roll into that figure, but the day after the report the denominator is still last year’s number. So the first-day P/E drop looks like a bargain that is partly an illusion: the market isn’t pricing the past, it’s pricing next year.

A sceptic would say: then why quote trailing P/E at all? Because that’s the number most quote pages show by default. It’s a fair starting point and a poor finishing point.

Why can the P/E rise when the stock falls?

Because the denominator that matters is forward earnings, and the miss changes it. The price fell 8%. If analysts cut next-year earnings by more than 8%, the multiple expands.

Say analysts cut the next-twelve-months estimate from $3.90 to $3.50. That’s $0.40 lower, or 10.26%.

• Forward P/E before: $100 ÷ $3.90 = 25.64
• Forward P/E after: $92 ÷ $3.50 = 26.29

The stock got cheaper in dollars and more expensive per dollar of expected profit. Price fell 8.0%. Expected earnings fell 10.3%. The gap is the whole story.

To hold the forward P/E at 25.64, the price would need to be $3.50 × 25.641 = $89.74. That’s a 10.26% fall. Anything less than that and the market is still paying a higher multiple than it was last week. Whether that’s reasonable depends on whether it believes the miss is temporary. Nobody can know that on the day.

Where do the lost earnings come from?

A revenue miss doesn’t hit profit one-for-one. It hits at the gross margin, because the costs of running stores and brands don’t shrink when sales do. Here’s a rough chain using stated assumptions:

• Expected revenue $12.0 billion, actual $11.6 billion. Miss: $0.4 billion, or 3.33%.
• Assume 40% gross margin on the lost sales: $160 million of gross profit gone.
• Assume a 20% tax rate: $128 million after tax.
• Assume 1.5 billion shares: $128 million ÷ 1,500 million = about 8.5 cents per share for the quarter.
• If the same shortfall repeated for four quarters: about 34 cents per share a year.

That gets you most of the way to the 40-cent cut in the estimate. The remaining 6 cents or so would have to come from margin pressure, such as discounting to clear inventory. That last piece is my assumption, not a sourced figure. Real analyst models are more detailed than this, and the gross margin and tax rate are placeholders.

The point of the chain: a 3.3% revenue miss produced a 10.3% earnings cut. Small revenue changes get magnified because profit is the thin slice left after costs. That magnification is why a stock can drop hard on what looks like a modest miss.

What happens to earnings yield and dividend yield?

Both flip the same ratios upside down. Earnings yield is earnings divided by price, and dividend yield is the dividend divided by price. A lower price raises a yield when the top number holds still.

Read the middle row carefully. Trailing earnings yield rose, which looks like a better deal. Forward earnings yield fell, because expected earnings dropped faster than the price. Same stock, same day, two opposite signals. They disagree because one looks backward and one looks forward.

The dividend yield rose from 1.40% to 1.52% only because the price fell. The $1.40 itself didn’t move. If the company cuts the dividend later, that 1.52% was a number on a screen and nothing more.

One more check on safety. The payout ratio, dividend over earnings, was $1.40 ÷ $3.60 = 38.9% on trailing earnings. On the new forward estimate it’s $1.40 ÷ $3.50 = 40.0%. It crept up a little, nowhere near the line where payouts start to look stretched.

Does the yield beat what cash pays?

A fair question is whether a 3.8% earnings yield compares with safer alternatives. The Federal Reserve publishes selected interest rates daily in its H.15 release, including Treasury yields at several maturities. Pull the figure for the maturity you care about and set it next to the earnings yield.

I haven’t put a Treasury number in this article, because the rate changes and I’d be guessing. What to know about the comparison: an earnings yield isn’t cash you receive. It’s profit the company earned, of which only the dividend portion reaches you directly. The rest is retained, and whether it’s worth anything depends on what the company does with it. A Treasury coupon is paid to you. They’re not the same kind of yield, and the comparison is rough on purpose.

What if Dana reinvests the dividend?

Her $42 a year buys a bit more stock each year at whatever the price is then. At $92, $42 buys 0.457 shares. At $100 it would have bought 0.42. A lower price means each reinvested dollar buys slightly more shares.

Over many years this compounds. You can model it with the SEC’s compound interest calculator on Investor.gov, which lets you set a starting amount, a monthly contribution and a rate. It doesn’t know anything about dividends or share prices, so you’d be plugging in a rate you assume. Treat that as an illustration, not a forecast. A stock’s return isn’t a fixed rate, and a calculator can’t tell you what it will be.

What this does not tell you

The numbers above are invented. Nike’s actual share price, earnings, dividend, share count and margins differ, and I haven’t used them. If you want the real figures, they’re in the company’s own filings, and the SEC’s EDGAR database holds them.

Several assumptions carry weight:

• Share count held constant at 1.5 billion. Buybacks would change per-share figures.
• A 40% gross margin and 20% tax rate on lost sales are placeholders.
• The 10.3% estimate cut is one scenario. Analysts might cut less, or more, or cut next year and restore later.
• Earnings yield isn’t a return you receive. Most of it is retained inside the company.
• The 8% drop is a day-one move. Prices keep moving, and the next quarter can reset every number here.
• Nothing here accounts for taxes on dividends, trading costs or your own holding period.

And the biggest limit: P/E and yield describe price against profit. They say nothing about whether the profit will return. A low P/E has often belonged to a business whose earnings were about to fall further.

FAQ

Does a lower P/E after a drop mean the stock is cheaper?

Only against the earnings figure you’re dividing by. If you use trailing earnings, yes, the ratio fell from 27.78 to 25.56. If you use forward earnings after a cut, the ratio rose from 25.64 to 26.29. Check which earnings number the quote page uses before reading it as cheap.

Why does a small revenue miss cause a big price move?

Because profit is a thin slice of revenue, so a small revenue gap becomes a larger profit gap. In the example, a 3.3% revenue miss became a 10.3% cut to expected earnings. The price reacts to the expected profit change and to the doubt about whether the miss repeats.

Does a higher dividend yield after a drop mean a better income stream?

No. Your dividend cheque is the same $42. The yield only rose because the denominator, price, got smaller. A better income stream would need a higher dividend per share, or a lower price paid, and Dana paid $100.

How do I check if a dividend is safe after a miss?

Look at the payout ratio: dividend divided by earnings. Here it moved from 38.9% to 40.0% after the estimate cut. Also check whether the company’s own statements describe the dividend policy. The ratio is a screen, not a guarantee.

Is earnings yield the same as the return I’ll get?

No. Earnings yield is profit divided by price. You receive only what’s paid out as dividends, plus whatever the market later pays for retained earnings. Retained profit can be reinvested well or badly, and neither the ratio nor this article can say which.

Where do I find a current interest rate to compare against?

The Federal Reserve’s H.15 release lists daily Treasury and other selected rates. Use the maturity that matches your time horizon, and remember that a coupon is paid to you while an earnings yield isn’t.

What to look at next

Open the company’s latest quarterly filing and find three things: revenue by region, gross margin, and the guidance for next year. Rebuild the lost-sales chain above with the real gross margin and tax rate. Then compare the forward P/E before and after the revisions, not only the price. Try running your own numbers through the calculator at Investor.gov with a few different rates, and notice how little the result depends on any single day’s price.

This article is general information, not financial advice. See our disclaimer.

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