Insiders Have Sold Nike, Should You?

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

At the end of December, Mark Parker, the President and CEO of Nike (NYSE: NKE) sold nearly $5 million stake in the company at the average price of $51.63 per share. The current share price is trading a bit higher than his sale price, around $52.88 per share. Should investors consider this move bearish? Let’s dig deeper.

Business Snapshot

Nike is the world’s manufacturer of footwear and apparel for sport activities including running, tennis, soccer, golf, etc. The majority of its revenue came from 442 outlets in the international market, accounting for 58% of the total revenue. Within the US, Nike had around 384 retail outlets, generating around 42% of the total revenue in fiscal 2012. Nike had a diverse customer base, as no customer represented about 10% or more of the total revenue in fiscal 2012. Nike’s products were manufactured in emerging markets around the world including China, Indonesia, Vietnam, Argentina, Brazil, India, etc.

Business Divestitures in 2012

In the last quarter of 2012, Nike announced that it would divest the two brands, Cole Haan and Umbro, for $795 million in cash to focus on NIKE and other complimentary brands. Cole Haan was sold to Apax Partners for $570 million and Umbro was sold to Iconix Brand Group (NASDAQ: ICON) for $225 million. After the deal, Inconix will own Umbro’s global football loyal customer base with 30 licensees in more than 100 countries. Because of the divestment, Nike reported the net loss of $137 million. In the fiscal 2012, Umbro and Cole Haan generated around $797 million in total revenue. Thus, the deal valued the two brands at roughly 1x sales, lower than Nike’s valuation of 1.87x P/S in the market.

Significant Insider Ownership

From December 26 to the end of 2012, the CEO Mark Parker has sold nearly $5 million worth of shares in the marketplace. In addition, other executives including CFO, General Counsel, President of Direct to Consumer, President of NIKE Brand, VP of Merchandising and Product all sold their stocks in the market, with the total combined transaction value of more than $6.8 million. Donald Blair, the CFO, exercised 22,000 shares at $13.06 per share and sold in the market at $51 per share, with the total transaction value of more than $1.12 million. However, as Yahoo! Finance indicated, it was automatic sales from options exercised. Looking deeper, Nike had a significant insider ownership. Philip Knight, the company’s Chairman of the Board, owned 74.8% of the total class A shares. If all of his Class A shares were converted into Class B, his stake would account for more than 15.5% of total Class B stocks.

Decent 10-Year Performance but Expensively Valued

In the past 10 years, Nike has managed to consistently increase its EPS and dividend payments. The EPS has grown from $0.44 in fiscal 2003 to $2.37 in fiscal 2012. In the same period, its dividend per share increased from $0.13 to $0.70. It also generated consistently positive operating cash flow and free cash flow. In the past 12 months, the operating cash flow and free cash flow were nearly $2.35 billion and $1.76 billion respectively. The TTM ROIC was as high as 20.6%.

Compared to its peers including Adidas (NASDAQOTH: ADDYY) and Iconix, Nike is the most expensively valued in the market, with 12.86x EV/EBITDA, whereas Adidas is valued at 9.72x EBITDA multiples and Iconix is valued at the cheapest, at nearly 8.5x EV/EBITDA.

Foolish Bottom Line

Nike, I believe, in the long-term, would continue to deliver decent performance for income investors in the future, along with the consistent dividend payments. However, with the insiders’ sales, and the double digit EBITDA multiple, the current price does not provide investors a good entry point into the stock now.

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of 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!



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