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Using a Value Line Report: NIKE: Fit for Solid Gains in the Long Run
Global athletic footwear, apparel, and equipment manufacturer Nike, Inc. (NKE - Free Nike Stock Report) has made tremendous strides since its early days as the brainchild of University of Oregon track athlete Philip Knight and his, then, coach Bill Bowerman. These gentlemen started the company as a distributor for Japanese footwear maker Onitsuka Tiger (now ASICS) under the moniker Blue Ribbon Sports back in 1964. The men decided to lose the Blue Ribbon Sports name (along with the Onitsuka deal) in 1971, when they launched their own footwear design and development outfit they called Nike, made famous by the swoosh, which has helped the company’s brand become one of the most valuable in the world among sports businesses (worth nearly $11 billion).
From an investment standpoint, the stock’s recent addition to the roster of blue-chip Dow-30 components comes as no surprise given the equity’s exemplary track record of price performance over the past decade. A glance at the top of the Value Line report, where the Target Price Range chart is located, reveals that the stock has risen about 650% since 2003. Indeed, the graph below illustrates that the shares exhibited the most notable momentum over the past four years, as it shot out of the 2008-2009 recession like a bullet, surging more than 270% to record highs, the most recent of which was achieved a few days before this report was published when NKE hit an all-time peak of $80.14. All in all, the stock has been on an impressive run for some time and, although analyst Craig Sirois suggests that investors “wait for a pullback in the share price” (Analyst Commentary), we believe that any decline would likely be short lived.
The strong price gains over the aforementioned period have probably been propelled by the company’s consistently solid earnings growth during the span. Scanning across the page, the Annual Rates box displays Nike’s financial performance over the last five and 10-year periods. All of these growth rates are in the double digits, with the most notable being dividends and earnings, 19% and 14.5%, respectively. Those are quite compelling figures. Furthermore, 13% cash flow and 10.5% sales growth rates are nothing to scoff at either. Meanwhile, if one shifts attention to the historical financial data in the Statistical Array, a look at the company’s operating margins shows that this ratio has been fairly consistent for several years. This suggests that management has a highly efficient and disciplined operating model in place. Not to say that rising margins wouldn’t be more appealing, but the sustainability of profit advances is, arguably, a more admirable trait. Moreover, it stands to reason that these steady margins are maintained by Nike’s economies of scale and healthy allocation for marketing expenditures that directly support revenue growth. This is substantiated by the reality that the company’s iconic brand is very dominant in its respective markets, as the vast majority of consumers are willing to pay a premium for footwear and apparel that bear the famed Nike swoosh.
Beyond the company’s noteworthy historical results, the more pertinent consideration is NKE’s potential over the next several years. The 3- to 5-year Projections box indicates that these shares recently hit the low end of Mr. Sirois’ Target Price Range, which suggests that the analyst is not particularly bullish on the stock. A gander at the P/E Ratio at the top of the page offers some credence to his outlook, as 25.4 is a historically lofty multiple for this equity, at least over the past decade. Moreover, it is well above the projected average annual ratio out to 2016-2018. This data indicate that much of the stout sales, earnings, cash flow, and dividend growth we envision over the next 3 to 5 years is already reflected into the current quotation.
Nonetheless, Nike’s outstanding financial condition is evident in the Ranks box, where it boasts a superlative Safety rank of 1 (Highest). This is further supported by its outstanding scores in the Financial Strength box, which includes a top-notch Financial Strength Rating (A++) and Earnings Predictability marks (100 out of 100), as well as elevated tallies for Price Growth Persistence and Stock Price Stability (90 and 85, respectively). Furthermore, the company’s immaterial debt load and flush cash coffers offer considerable financial flexibility for investing in growth opportunities, brand acquisitions, research and development, and enhancing shareholder value by augmenting its dividend increases and share buybacks. All told, our current projections could prove rather conservative should Nike employ some more aggressive growth strategies going forward. In any event, we believe NKE shares are a solid addition to any portfolio. However, as Mr. Sirois suggests, investors should probably hold off until a more suitable entry point presents itself.
At the time that this article was written, the author did not have positions in any of the companies mentioned.