Nike (NKE): The quintessential international company ~ market folly

Saturday, April 19, 2008

Nike (NKE): The quintessential international company

Buy: NKE, Target Price: $73, Time Frame: 6 months

Nike (NKE) is one of the first stocks that comes to mind when you think of big, bluechip names. They consistently seem to perform and offer the slow, boring, yet consistent returns on your investment. Even though that might be the case with most bluechip names, NKE is far from that. Over the past year, NKE is up 32.6%. Over the past 5 years, NKE is up 200%. So, as you can see, NKE might be a boring blue chip name, but they certainly don't come with the typical 10-15% bluechip returns. In fact, NKE is performing at a rate that is nearly double that of most boring blue chip large cap names. The point of this analysis is to point out that obviously, NKE is a buy on any dip. If you pull up a chart of Nike, no matter what time frame, you will see a nice uptrending chart. Stocks that trade like this are simply buys on the dips, and NKE is just that. They are seeing huge growth internationally and so in addition to playing a great company, you're gaining a lot of international exposure as well.

Fundamentally, it should come as no surprise that NKE is just dominant in their industry. With a PE of 18.6, they are slightly cheaper than the industry average of 20. Their price to sales ratio of 1.82 implies that they are very cheap on valuation. Any equity with a PS ratio of less than 5 can be deemed undervalued, and NKE definitely falls into that category. They also have operating margins of 13.6% and a return on equity of 25.3% (slightly accelerating too), both very solid numbers that exemplify NKE's solid fundamental drivers. So, overall, NKE is pretty fundamentally sound, but we already knew that. They are seeing quarterly revenue growth of 15.7% and quarterly earnings growth of 32%, both great numbers, even with a slowing US environment. This just goes to show how much international exposure Nike has, and how beneficial it is to them.

Analyst sentiment: There are currently 2 strong buys, 3 moderate buys, and 3 holds on Nike. So, 5 overall buys and 3 holds is pretty bullish. The 'hold' analysts are obviously telling us to hold for the long term as they see continued, consistent blue-chip like growth ahead for NKE. In addition, both UBS and Merrill Lynch rate NKE 5 stars, while Citigroup rates NKE 4 stars. This information is also bullish for NKE. Overall, analysts expect NKE to significantly outperform the market over the next six months with very little risk. Earnings growth over the past year has held steady when compared to earnings growth over the past 3 years. And, one or more analysts have modestly increased their quarterly earnings estimates for NKE. Turning to the institutional ownership aspect of NKE, we see that Fidelity, Barclays, State Street, Vanguard, Janus, Dodge & Cox, and Berkshire Hathaway are all major shareholders. Each of the above has invested at least $448 million into NKE, with Fidelity investing as much as $993 million. Not to mention, behemoth hedge fund Renaissance Technologies has a very large stake in NKE, which provides investors with that much more confidence. Anytime a consistent hedge fund performer like Renaissance is in a name you're looking at, its always comforting. They all expect NKE to continue to perform with relatively low risk.

Lastly, NKE's earnings reports just reaffirm what we already know. Nike is showing a 10% increase in profit, mainly fueled by international growth. These results all exceeded analysts expectations as well. Quarterly revenue has been up 14% and with all their international exposure, Nike certainly benefited from currency discrepancies (especially the weaker Dollar). Revenue growth in the Americas was up 19% and 18% in Europe and 17% in the Asia Pacific region. Growth in Europe and Asia was notably much stronger than what analysts were anticipating. CEO Mark Parker said that their quarter "illustrates the ability of our portfolio to deliver consistent, profitable growth." And, what more can you ask for from a company? (Especially a huge company like NKE). Lastly, Nike also saw an increase in cash, gaining $3.1 billion by quarter's end. They are making several notable changes by selling Nike Bauer Hockey up for sale and having recently acquired Umbro PLC, a soccer company. This is definitely a move in the right direction for Nike as soccer continues to grow as the "world's favorite sport." By picking up Umbro, Nike has essentially picked up a solid soccer presence to add to their already large European soccer market share. But, at the same time, Nike will see dividends paid from this investment worldwide, not just in Europe. And, they sold off their presence in the dwindling hockey market.

Nike is a solid company with solid fundamentals and solid growth. If you were to use one word to describe Nike, it would have to be: solid. They simply continue to perform in that boring, blue chip fashion. But, instead of offering the typical modest blue chip gains, Nike is tearing it up. And, the best part is, they will continue to do so. Nike is a buy on any dip.

Buy: NKE, Target Price: $73, Time Frame: 6 months