Time to Grab Nike Shares off the Sale Rack

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

No other sports and apparel brand is as well known as Nike (NYSE: NKE) around the globe.  The venerable brand reaches almost every corner of the world and encompasses nearly every major sport.  That global presence hasn't helped shares of the company this year.  In fact, 2012 has been quite unfriendly to Nike.  After hitting a high of $114.81 in early May, shares traded well below $90 last week.  Nike is down more than 6% year-to-date while the S&P 500 is up more than 7.5%.

It didn't help last week when Nike announced fourth quarter results that missed analyst estimates.  Nike reported earnings of $1.17 per share while the street had expected $1.37.  The street, notoriously short-sighted, sent shares plummeting.  However, for those of us who have a little more vision than three months out, Nike looks like a global brand on sale.  Nike experienced higher input costs in 2012 but also increased spending around key product launches, advertising within the European Championship and in preparation for the 2012 Olympic games.

A China slowdown and the debt crisis in Europe are additional drags on Nike.  The company has stated that it is seeing a slowdown in growth in both China and Western Europe.  Inventories are also higher than the company would like in those areas. 

Inventories have also increased in North America, but the continent is showing strong sales growth.  Nike can reduce inventory more easily in North America through its factory stores, which remain very profitable.  Over the last two years, revenue in North America has increased 30%.  This increase is in spite of a very competitive North American athletic market.  In the United States Nike faces intense competition from Under Armour (NYSE: UA) as well as a host of global brands. 

Direct-to-consumer sales play a key role in the North America market.  DTC sales grew 17% in the fourth quarter and for the year passed $2 billion in revenue.  The DTC channel includes the Nike factory stores and online sales.  Going forward, a recently signed deal with the National Football League to provide team uniforms should be a growth driver in the U.S.  Emerging markets, including Brazil, are also key to Nike's future growth.  Brazil will hold both the World Cup and Olympics over the next four years, which should help Nike increase its presence and DTC sales in this key market.

Nike has placed a tremendous amount of focus on new innovations.  The company is launching Flyknit shoes this month in the United States and at this point is selling every single pair that they can make.  The Flyknit is a new ultra-lightweight running shoe made without stitching or glue.  Eventually it's possible that consumers will be able to design and customize their own pair of Flyknit shoes and have them made.  Nike feels that the Flyknit can be a brand on the same scale as its Lunar brand of shoe.  The Lunar brand, launched in 2008, has surpassed $2 billion in annual sales worldwide.  Another new product, the Nike Fuelband, brings even more technology to the athletic market.  The Fuelband is a wristband that is worn when exercising and doing everyday tasks.  It measures all types of movement and tallies daily amounts on Nike software or a smartphone app.  All of this translates into an even more promising future for the global brand.

Shares of Nike aren't reflecting any optimism right now.  Nike trades at just over 19 times this year's earnings and 15 times future earnings.  Compare that to Under Armour, which trades at 48 times trailing twelve month earnings and 30 times future earnings.  Nike trades at 1.38 times sales while Under Armour trades at more than 2.5 times sales.  Nike boasts a return on equity of 22%.  Nike has a pristine balance sheet with $8.20 per share cash on its books and only $0.50 per share of long-term debt.  Nike has grown revenue at more than 8% annually over the last five years.

 

Nike is being penalized for being a global company.  Being global was once seen as a benefit if not a necessity for companies.  That has changed since the European debt crisis and China slowdown.  Company valuations are being discounted due to overseas exposure.  In contrast, shares of U.S.-centric companies are being viewed as a safe haven.  This will change again someday and investors will once again reward global companies.  In the meantime global companies such as Nike are presenting an opportunity for long-term investors.

The long-term prospects for Nike are still very promising.  Nike is still the most recognized brand of athletic apparel and equipment around the world.  The company is innovating at great speeds and the opportunities for growth are tremendous.  While Wall Street is short-sighted and focused on where the company will be next quarter, those of us with a long-term view can take advantage of the current discount.  Nike shares are very reasonably priced and I am a buyer on pullbacks below $90 a share.  With a global brand and a reasonable 1.6% dividend yield, it may be time to pick Nike off the sale rack.


fjconstantino owns shares of Under Armour. The Motley Fool owns shares of Under Armour. Motley Fool newsletter services recommend 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. If you have questions about this post or the Fool’s blog network, click here for information.

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