Nike Will Continue Rising From its Olympic Year Bounce
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every four years, just as regular as the Summer Olympic Games, the share price of Nike (NYSE: NKE), the sportsware and retail store giant, rises due to the attention on the athletes wearing its signature gear. With the Summer Olympic Games upon us, Nike is up 4.2% for the last week of market action. Over the last three months of trading, however, Nike is down 12.04%. Year to date, the purveyor of The Swoosh is up just 1.36%.
Nike operates in a very competitive industry. There really are no boundaries. UnderArmour (NYSE: UA) is a direct competitor. Major retail chains such as Wal-Mart, Target and Costco sell sports gear; in addition to niche competitors such as Ralph Lauren (NYSE: RL), Lululemon Athletica (NASDAQ: LULU) and Columbia Sportswear (NASDAQ: COLM). Every professional sports team and college sells athletic clothing items. In footwear alone, there is Puma, Adidas, Converse, and Reebok, among many others fighting for the consumer dollar. All are competing with Nike for the same dollar much of the time.
While Nike is the "Evil Empire" it does not carry with it the imposing valuations that a Darth Vader would command. The price-to-earnings ratio for Nike is 20.51. For UnderArmour, about 11 percent the $44 billion market capitalization of Nike, the price-to-earnings ratio is 58.66. Lululemon Athletic, less than one-tenth the market capitalization of Nike, has a price-to-earnings ratio of 45.28.
This is as a result of poor results for the fourth quarter ending May 31. Earnings per share of $1.17 were not only lower by $0.06 from the previous year, but also $0.20 below analyst estimates. As a result, Nike fell from around $115 a share in May to below $90 before rebounding to the current level of about $97.
While expansion in China is slowing, the sales growth for Nike on a quarterly basis is up by 12.21%. That tops the five-year sales growth average of 8.13%, which is very bullish. It also handily beats the 0.02% quarterly sales growth figure for Columbia Sportswear, which has a price-to-earnings ratio in the range of Nike's.
The 9.21% profit margin of Nike also compares favorably to others in the sector. Columbia Sportswear has a profit margin of 5.58%. The profit margin at UnderArmour, with a price-to-earnings ratio more than twice that of Nike, is just 6.44%.
In addition to its profit margin and improving sales growth, the solid cash flow of Nike and sound capital structure (almost do debt) allows for a generous dividend program. While the dividend yield is 1.48%, Nike has been raising it and buying back shares for the past decade. With a dividend payout ratio of just 28.74%, far below historic average of around 50% for a member of the Standard & Poor's 500 Index, Nike has ample cash flow to increase the dividend or initiate share repurchase programs. While UnderArmour and Lululemon do not pay dividends, the yield for Ralph Lauren is only 1.08%.
Also bullish for Nike are the high levels of institutional ownership and the low short float. When institutional owners such as mutual funds or pension groups buy a stock, it is an impramtur that the company is a good buy. Insitutional investors are not only highly desired by companies, the research resources are deep to determine the best buys.
Nike has a institutional ownership of 85.26% and a short float of only 1.13%. A short float of 5% is considered to be troubling for a company. By contrast, Columbia Sportswear has institutional ownership of only 38.13% with a short float of 13.42%. For Lululemon, the short float is 26.27%. UnderArmour has a short float of 8.92%.
Now trading around $97 a share, the mean analyst target price for Nike over the next year of market action is $103.56. The "Buy" recommendation for Nike was just reiterated by TheStreet due to the healthy revenue growth and solid financial structure. StockScouter currently rates Nike an 8 with 10 being the best.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, 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.
