Why You Should Buy This Market Leader

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

It’s good to be a leader, both in life and in stock market. Nike (NYSE: NKE) is a clear leader in the sport apparel and shoes segment. The company is enjoying everything that a true leader would enjoy: fame, power and money. The company's recent quarterly report has confirmed Nike’s position. Here’s why I think Nike can find a place in your portfolio.

The report shows strength

Nike has reported earnings of $0.76 per share, beating analysts’ estimates. Quarterly revenue came at $6.7 billion, up 7% year over year. Nike revenues grew in almost every geography except for Western Europe and China. The growth of revenues was followed by a growth in gross margin, which is a very healthy sign.

North America remains the stronghold for Nike. The sales in this region grew 12%, driven by a strong brand position and good sales execution. Emerging markets grew 8%, being another bright spot. Good dynamics were seen in other Nike’s brands. Converse, Nike Golf and Hurley grew 9%, 9% and 5% respectively.

The battle for China

China remains an enigma for sport apparel companies that try to conquer the country. Nike was pleased to announce that China sales were flat in the most recent quarter after declining 8% in the previous quarter. Other sport apparel companies, like Under Armour (NYSE: UA) and Lululemon (NASDAQ: LULU), also struggle to get this puzzle solved.

Nike’s strategy in China is patience. The company is building a reliable retail network to promote and sell its products. In addition, the company has to find a pricing strategy that will work well. Despite the decade of growth in China, a big number of Chinese consumers continues to be very price sensitive. Nike has been offering discounts to convince consumers to try the brand.

Under Armour and Lululemon are trying to find their own ways to get in. In contrast to Nike, they do not possess such a huge marketing machine. Lululemon’s CEO is about to leave the company on the verge of the global expansion of the brand. In addition to this, Lululemon’s products are pricey. In a lot of cases, they are even pricier than Nike’s comparable products. This fact could present difficulties for the company when it tries to reach the Chinese consumer.

Although Under Armour has expressed its interest in China, the company seems to lack knowledge on how to win this market. In the meantime, it is possible that Under Armour is not laying all its cards on the table yet. It may unveil more of its Chinese market strategy in its next earnings report, which is scheduled for late July.

Valuation and growth prospects

Nike’s solid growth machine is selling at a reasonable price. The company's stock trades at 18.2 forward price-to-earnings ratio and yields 1.32%. Nike also has a share repurchase program under way. During the most recent quarter, the company has repurchased 4.2 million shares for approximately $242 million.

Next year will see the Winter Olympics in Russia and the World Cup in Brazil. Such big events are typically big drivers for sports companies if they are in good shape and can successfully market their products. Nike is in perfect shape with almost $6 billion in cash and short-term investments on its balance sheet. The company has only $1.2 billion of long-term debt.

Lululemon's share prices were slashed after the announcement of CEO departure, and the company's stock is now down 14% year-to-date. The growth was good at Lululemon, but investors are expressing their concern about the sustainability of this growth. Lululemon is trading at 25.5 forward price-to-earnings ratio, which might be considered fair given the uncertainty surrounding the company and its growth strategy.

Under Armour, which is up 23% this year, trades at 32.6 forward price-to-earnings ratio. Under Armour is expanding its running segment, which is a smart move as running is the leading segment for Nike. At the same time, the company must provide serious growth to justify its price. China is currently the biggest underserved market, and the company’s strategy there remain foggy.

Bottom line

Nike is attractively priced. The company generates growth across its segments and geographies. The most interesting growth possibility for Nike remains China. Although the company states that Chinese sales will be down in the next quarter, I believe that its strategy there will eventually pay off. Nike has great quality of execution, and this would certainly help the company in the fight for such a tempting market.

All in all, buy the leader.

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, 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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