Why Nike Can Turn You Into a Champion Like LeBron
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Watching LeBron James post a triple double and capture his first NBA championship ever got me thinking about basketball shoes. Basketball is one of my favorite sports and the brand of shoes I like to wear when I play is Nike (NYSE: NKE). To me, nothing beats its quality. Granted, since I am not LeBron James or Kobe Bryant, it is not much of an endorsement. However, those same players I just mentioned dominate the NBA while sporting Nikes. Kevin Durant, LeBron James, Kobe Bryant, Dwayne Wade, and Carmelo Anthony all wear Nikes when they ball.
For Nike, it is truly an ingenious way of advertising. What is a better product demonstration than watching OKC Kevin Durant score 32 points while wearing the Nike Zoom KD IV? Nothing (except maybe watching LeBron get his championship while wearing the Nike LeBron 9 PS Elite). When people see the best athletes in the world wearing Nike, it tells them that the product works. It tells people it is the best. Fans who play the sport want to wear the same shoes because they want to be as good as their favorite player while also being fashionable.
As proof, look no further than the Nike Air Jordan’s. Michael Jordan is the best basketball player ever and the Air Jordan brand is Nike’s highest selling signature basketball shoe brand ever. The shoes are so popular that when the Air Jordan 2012 was released, there was mass chaos in stores across America. In short, Nike’s advertising model works and it works beautifully. It has built Nike into the dominant brand and the go-to brand in sports that it is today.
Nike’s successful advertising and strong brand is reflected in its strong business performance. Over the last 10 years, Nike has more than doubled its revenue. Since the first quarter of fiscal year 2007, Nike has had a return on invested capital of over 20% for 19 quarters and its lowest return was 16.9% (that is actually good). In the last twelve months, Nike generated a return on investments of 20.13%, a return on assets of 15.49%, and a return on equity of 22.58%. In fiscal year 2011, Nike had record revenue of $20.9 billion and record earnings per share of $4.39. For a large cap company, that is an amazing performance.
Furthermore, Nike’s future is bright. The strong growth of media consumption devices makes Nike’s already successful advertising model even more dominant. For professional sports games, the increasing resolution of modern day displays makes it easier to spot the Nike signature trademark on the shoes of super star athletes and on other sports gear. Also, media is getting easier to access worldwide, which means more people are able to watch Kobe Bryant make a fade away while wearing his Nike Zoom Kobe. In addition, the London 2012 Olympics is fast approaching. The Olympics will give Nike an opportunity to implement its efficient advertising on a big stage. Basically, all these factors will make the Nike brand stronger.
Also, Nike has plenty of room to grow. In the third quarter for fiscal year 2012, Nike generated $694 million of revenue in China. While the revenue grew by 25% year over year, it is still way less than Nike’s North America revenue of $2.15 billion. With the largest population in the world, it is likely that Nike’s growth in China is just getting started. Looking at its balance sheet, Nike has a tangible book value per share of $20.59, cash and short term investments of $3.20 billion, and total debt of only $369 million. That is a pristine balance sheet. So what is Nike worth? It is hard to say, but to estimate a value for Nike, investors can focus on the company’s rate of return.
Rate of return = EPS / (stock price – tangible book value per share).
Using Nike’s trailing twelve months earnings per share of $4.80, Nike currently has a rate of return of about 6%. This might seem average, but the company is actually underpriced. The rate of return calculation, does not take into account growth. Nike’s business has been growing steadily and it is setup perfectly to continue its growth. As a result, Nike’s rate of return can grow much higher. Thus, I believe the company is a very good investment. Nike has a lot going for it. It has a top notch growing brand, excellent management, makes quality products, and advertises extremely well. It is worth paying the price for such a great business. Nike can turn you into a champion.
iamgreatness has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.