This Stock Can Help Your Portfolio Sprint

Ayush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Unless you've been living under a rock, Nike (NYSE: NKE) needs no introduction. With a wide range of products and prominent brand strength, Nike is regarded as the best sports utility developer and supplier around the world. The company recently released its quarterly results, which showed solid growth in its margins as it beat consensus estimates. 

But, is Nike a worthy investment? I’ll save my opinion for later, but first let us take a look at the company’s quarterly performance.

Numbers from the past

The economic crisis can have an effect on the sales of many small athletic apparel companies, but not Nike. The ever growing demand for Nike products, driven by its recognition, enabled the company to generate revenue of $25 billion, indicating an increase of 7% from the prior year. Barring China, sturdy performances in almost all the countries enabled Nike to improve its margins.

The increase in the company’s net income was even more remarkable, as it recorded a growth of 10% to $2.9 billion than the previous fiscal year. The increase in net income was propelled by the hike in merchandise prices and decline in material costs, thus offsetting the negative impact of increased labor expenses and unfavorable foreign exchange rates.

Nike’s earnings per share grew 11% to $2.69 per share, which was primarily driven by innovations across all segments, generating enthusiasm in the marketplace and thereby leading to an increase in customer traffic. Apart from that, Nike’s high-margin sales, motivated by its brand’s popularity, enabled the company to boost its margins.

The performance of the previous quarter was impressive, but can Nike sustain its recent success and deliver good returns in future? Let’s take a look at the factors which may augment the company’s performance.

Upcoming sprint

A look at Nike’s future plans will certainly impress you. With the implementation of these strategies, it is highly probable that the company will achieve its goal of long-term success.

Firstly, Nike has divested its under-performing brands like Cole Haan and Umbro as the company projects a growth of 7%-9% in revenue in the next fiscal year. The divestment has amplified Nike’s short-term investment to $2.2 billion, and this influx of cash holds the key to Nike’s future success.

Secondly, Nike is planning to build on the back of the recent success of its innovations as Mark Parker, CEO and President, over the last conference call stated that the company has many new products in its pipeline for the future.

Thirdly, recent share repurchases of a whopping $1.6 billion is a sign that it is focused on returning shareholders an excellent value.

Lastly, the high-margin sales, driven by the brand’s reputation, will continue to benefit the company’s margins in the future.

I’m sure these must have given you enough confidence in the business structure of Nike, but before you go ahead and invest your hard-earned money into the company; let’s take a look at its competitors, which may damage its sales in the future.

Challengers trying to catch up

Is there any company which is capable of completely out-muscling Nike? I don’t think so, but in my opinion, there are a few smaller companies like Adidas (NASDAQOTH: ADDYY), Under Armour (NYSE: UA), Puma etc. which may harm Nike’s sales.

Adidas, one of Nike’s biggest competitors, is trying to get in the way. Although Adidas is playing second fiddle to Nike, it has a similar presence in the international market. This can be backed up by the fact that Adidas generates 60% of its revenue from the international market. The company is further trying to tighten its grip on the international market by planning to set-up around 100 stores in 2013.

Adidas is also looking to match the innovations of Nike as it recently introduced a pair of running shoes that created great excitement among its fans. The expansion of stores, and the innovations, especially in the footwear segment, is a sign that Adidas is taking long strides towards catching up with Nike and is determined to dethrone it as the world’s biggest sports wear supplier.

Apart from Adidas, another company which may damage Nike’s sale is Under Armour. Personally, I’m not a big fan of Under Armour, neither as a company nor as an investment. Under Armour doesn't have the same international presence as its superior rivals, and can only give Nike a run for its money in the U.S as the company generates around 94% of its revenue from the country.

The recent quarterly results of Under Armour were impressive as it boosted its margins. The company’s revenue increased 23% to $454.5 million, while its net earnings increased 165% to $18 million. The amplification in its margins was driven by the increase in sales of apparel. This is the 15th consecutive time that the company’s apparel segment has undergone a growth of 20% or more, which is impressive, but the weakness in the other segments makes it difficult for Under Armour to catch up with Nike.

Final summary

The P/E ratio of Nike is 23.17; as compared to 33.5 of Adidas and 54.48 of Under Armour, which indicates that the company is a worthy investment. In my opinion, the strong international presence, ever growing demand for its products, and the brand’s popularity will help Nike perform better than its competitors in the long run. 

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Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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!

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