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Nike (NKE) – Huge Quality Stock But Not Cheap at These Levels

November 29, 2011 | About:
Mara Kohn

Mara Kohn

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Nike (NKE), founded in 1964 by Philip Knight, an Oregon track runner and Bill Bowerman, his coach, has been dominating the footwear and apparel fields for the last 40 years.

This company is a market leader thanks to its development capabilities, its recognized brands, its economies of scale and the athlete and team sponsorships. It also has a strong presence in emerging markets.

Its great development has laid the foundations to allow Nike to have a solid presence in running, basketball and golf categories. The acquisition of Umbro in 2008 has also enabled it to access the soccer market.

Furthermore, it is permanently launching new pipelines of products, thus catching consumers around the globe. The broadly diversified business lines allow Nike not to be reliant on any one market.

Speaking of running in particular, Nike has created the Nike+ club which organizes hundreds of races around the world. These types of events enable Nike to spread its products worldwide.

Nike's pillars are product innovation, marketing and distribution strategies. The three of them have positioned Nike as the largest company in its industry. The support of widely recognized athletes and the company's marketing resources have given it more credibility.

Its competency has not been match in the industry.

Internationally speaking, expansion is the major growth engine. Indeed, it has already entered the Chinese market, where sales are expected to amount to more than $2.3 billion annually in 2012 and to $2.5 billion in 2013, and the company is planning to launch the Umbro brand in Europe, South America and Africa.

But apart from future forecasts, it is necessary to consider last quarter's results.

Despite consumers' spending worries, Nike has outperformed expectations during the last quarter, which will definitely lead to an excellent fiscal year 2012.

In terms of stock, it is trading around the fair value estimate, thus offering investors some stability. Revenue has risen 18% and EPS have reached $1.36, that is to say, a 19% increase.



There have been earnings although gross margins have declined 270 basis points. Moreover, costs, such as selling, general and administrative costs have dropped, which means that they are very well controlled. Actually they represent a record 30% of total sales. This balances its gross margin deterioration.

Looking back to sales, the tax rate has gone down due to an increase in foreign revenue and 7 million shares have been bought back. Nike expects to continue with this buyback policy.

ROE is still running above 20%, thus validating Nike's rating.



Nike will start raising prices selectively, thus impacting gross margins in the next year to year and a half.

It is confirmed that Nike does not need to worry about economic problems. The last results and future forecasts enable the company not to consider macro economic uncertainty an issue. The only concern Nike has is the increase in inventory. But the firm will surely solve this issue at the commencement of the new fiscal year.

The general situation of uncertainty is not causing it to retreat. On the contrary, it is aggressively investing in the retail market and the investments are doing quite well.

The solid growth in footwear and apparel sales is showing that the middle class is consuming. The different product lines enable Nike to capture sales and profits from the entire group of consumers.

And that is not all: Future orders have risen 16%, thus reaching $8.5 billion.

Nike is definitely on the correct track. I think it is always surprising. Everyone, include myself, believes it has prepared something awesome for 2012, the Olympic year. I will just wait and see. Nike is unique.

Rating: 3.4/5 (14 votes)

Comments

adamcz
Adamcz - 2 years ago
Funny timing on this article for me, as I sold out the Nike position today that I had accumulated in 2006. I view it as one of the great durable moats and appreciate the low risk 15% compounded growth it brought me, but at 20x earnings I just see better opportunities out there right now. I'll always have Nike on my watch list hoping for a better discount to IV.

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