Three Reasons to Buy This Undisputed Heavyweight
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Nike (NYSE: NKE) have lagged the markets in the last year, with an accumulated return below 4.5% for the last twelve months versus more than 17% for the S&P 500 index in the same period. The company is facing some challenges like rising inventory costs and slowing growth in China, but Nike is still a high quality business with rock solid competitive advantages and strong fundamentals. Here are three reasons to consider a long position in Nike.
1. Unmatchable Brand Power
Elite athletes like Lebron James, Roger Federer and the national soccer team of Brazil have many things in common, superb talent is one of them, and Nike sponsorship is another one. Nike has invested through the decades in sponsoring many of the most renowned athletes in the world, and memorable marketing campaigns have made the company's brand the undisputed leader in the global athletic footwear and apparel industry.
The company has recently announced it's selling its Umbro brand to Iconix (NASDAQ: ICON) for $225 million. Nike paid $578 million in for Umbro in 2008 with the idea of strengthening its presence in the soccer market, where it was lagging behind competitors like ADIDAS (NASDAQOTH:ADDYY). Now that Nike is strong enough in that category, Umbro has become a distraction, but the acquisition has beared its fruits.
Nike scored a few goals in soccer over the last years: sales from that business grew from $1.5 billion in 2007 to near $2 billion currently. In fact, Nike sponsored more teams than ADIDAS in the last World Cup, something which would be very unlikely before the Umbro acquisition. This new leadership in soccer bodes well for the 2014 World Cup in Brazil, and it shows that the company has remarkable brand management capabilities.
2. Dominant Competitive Position
Not only has Nike gained market share versus competitors like ADIDAS over the last years, it has developed a position of strength when it comes to dealing with its retail customers too.
Nike products represent around a 50% of total sales for Foot Locker (NYSE: FL) and Finish Line (NASDAQ: FINL) combined, meaning that these two companies are sensibly dependent on Nike for growth and success. Being such a big player, Nike can negotiate prices and other conditions with retailers from a position of strength.
Size has many advantages for the company, and economies of scale are one clear example. Also, Nike spent more than $2.7 billion in “demand creation”- that's how the company calls marketing expenses – during last fiscal year. A powerful brand means a bigger market position, and that market position provides the financial resources to continue investing in the brand.
3. Fair Valuation
Shares of Nike are not dramatically undervalued, but the price is in line with historical averages in the zone of a P/E ratio around 20. The stock yields a modest 1.5% in dividends, and has been regularly increasing those dividends over the last years.
Nike has an active buyback policy and unquestionable financial strength, so investors can expect to be rewarded with the company's excess cash flows over the long term.
Investing is a Marathon
Investing is a marathon, not a sprint. The current slowdown in Nike shares has not affected its underlying value, and it should be considered an opportunity to invest in this high quality company at a fair entry price for the long term.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!