Nike (NKE, Financial) has taken a generic piece of apparel like the shoe and turned it into a brand name product.
When you think Nike, you think shoes.
Who hasn't worn a pair of Nike shoes? You might be hard pressed to find anyone who hasn't worn something made by Nike. Nike is one of the largest athletic shoe and apparel companies. With over 930 stores in 120 countries around the world, the Nike swoosh is hard to avoid. In fact, Nike has more than 60% of the North American athletic footwear market.
Nike has an identifiable consumer monopoly with their brand name, but they are facing increasing competition from companies like Adidas (XTER:ADS), Vans, and Skechers (SKX). How much competition will set Nike back? Mario Gabelli (Trades, Portfolio), Ken Fisher (Trades, Portfolio), and John Keeley (Trades, Portfolio) are buying. What do you think?
Looking at the company's debt, Nike has a long-term debt to equity ratio of 0.08, which is very low, given its long history of strong earnings.
Looking at Nike's EPS shows they have been growing at a rate of 13.90% for the last five years. Their earnings have been very consistent, increasing almost every year for the last 10 years. The EPS breakdown below shows Nike is strong and has an upward trend, which is what every investor is looking for.
2005 - $1.26
2006 - $1.32
2007 - $1.68
2008 - $1.86
2009 - $1.50
2010 - $2.07
2011 - $2.34
2012 - $2.21
2013 - $3.11
2014 - $3.35
2015 - $3.95
Nike focuses on shoes and clothing —Â businesses that are in their realm of expertise, which allows them to continue expanding.
Nike is also buying back $8 billion worth of shares.
The way management has been spending the retained earnings of Nike has increased their EPS, while also increasing shareholder value. EPS has grown by $2.69, from $1.26 a share in November 2005 to $3.95 in November this year. Therefore, we can argue that the retained earnings of 41 cents a share produced in the third quarter of 2015 with an after-corporate-income tax return of $2.69 a share results in a rate of return of 15.2%. This indicates that retained earnings are being profitably allocated, and as shown, has resulted in an increase of EPS. This has caused an increase in market price for Nike's stock, from $21.73 in 2005 to approximately $131.88 in November 2015.
Nike's return on equity is above average. Investors like Warren Buffett (Trades, Portfolio) love when a business can earn above average returns on equity. An average return on equity for a public company in 2015 is approximately 14.49%. Below is a yearly breakdown of Nike's return on equity for the last 10 years:
2005 - 23.83%
2006 - 21.69%
2007 - 24.36%
2008 - 23.74%
2009 - 17%
2010 - 21.19%
2011 - 22.56%
2012 - 20.41%
2013 - 26.05%
2014 - 26.71%
2015 - 28.71%
The average annual rate of return on equity for the last 10 years is 25.62%. Nike has consistently earned high returns on equity. This indicates that Nike's management does a superb job of profitably using retained earnings.
Nike raised its prices by 5.2% in 2011. Inflation will not affect the demand for Nike's shoes, and it won't stop Nike from raising its prices when the cost of cotton and rubber increases.
The one possible downside is how much Nike needs to spend to update their product line. While they do not disclose exactly how much they spend on research and development, Nike was granted 540 patents in 2013.
Currently Nike earns $3.95 per share. Divide $3.95 by the interest rate on long-term government bonds (I used the Treasury bonds), approximately 4.66%, and you get a relative value of $84.76 a share ($3.95 / .0466 = $84.76).
So far this year, you could have bought a share of Nike stock for as little as $90 a share and for as much as $133 a share. With an EPS of $3.95, if you paid between $90 and $133 a share, your initial rate of return would be between 2.97% and 4.39%.
Looking at Nike's EPS growth for the last 10 years shows that it has been growing at an annual compounding rate of 12.10%. So ask yourself this question: Would you rather own a treasury bond with a rate of return of 4.66%, or a Nike share with an initial rate of return of 4.39% that is increasing at an annual rate of 12.10%?
