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Long-term Investors Seeking a
Potential Slam Dunk Should Run to Nike

Ingrid Hendershot, editor of Hendershot Investments, rates NIKE (NKE) a “Buy”.

NKE is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. NIKE subsidiary brands include Converse, which designs, markets and distributes athletic lifestyle footwear, apparel and accessories; and Hurley, which designs, markets and distributes surf and youth lifestyle footwear.

Strong Global Brand

Nike was founded by University of Oregon track athlete Phil Knight and his coach Bill Bowerman in 1964 with Knight still owning 16% of the firm. Nike initially operated as a distributor for a Japanese shoe maker, which allowed Bowerman to bring his own innovative ideas into their designs. Making sales at track meets out of Phil Knight's car, Nike sold 1,300 pairs of shoes grossing $8,000 during their first year. Today, Nike boasts a strong global brand with revenues expected to top $34 billion in fiscal 2017. For more than 40 years, Nike has designed and shaped the athletic footwear and apparel market with innovative products, endorsement deals and advertising campaigns making it the most recognized name in the industry.

Innovation began early in the company’s history as Bowerman sought to develop a shoe with excellent traction on multiple surfaces. He commandeered the family waffle iron and substituted melted urethane for batter. Unfortunately, Bowerman forgot to grease the iron, and it glued shut. Despite this setback, he persevered and fashioned a flexible, springy and lightweight rubber material with a raised, gridded pattern and grip traction. One year earlier, Nike paid a graphic design student $35 to develop a logo for their shoes. The new waffle shoe with the now iconic Swoosh was introduced with much success to competitors at the 1972 Olympic track and field trials. That same year, Nike signed its first professional athlete endorsement deal with tennis player Illie Nastase. Since that time, Nike has built their brand by signing the world’s greatest athletes to endorsement deals and through their famous advertising campaigns such as “Just Do It.”

Even the famously plain and nameless jerseys worn by the Penn State Nittany Lions football team are adorned with the ubiquitous Swoosh, demonstrating Nike’s commitment to place their brand in markets their competitors can’t reach. This reach includes the firm’s focus on digital marketing through social media and platforms like the Nike+ app.

Consistent Growth

Nike has generated a track record of consistent growth with sales compounding at an 8.5% annual rate over the last five years and EPS running even faster at a 15.8% annual pace. With strong competitive advantages, Nike has posted 28 consecutive quarters of growth in the face of fierce industry competition, a volatile economy and a rapidly changing retail landscape. Revenue growth for fiscal 2017 is expected to be in the high single-digit range with sales in China, emerging markets and direct to consumer outlets driving the company’s long-term growth.

Outstanding Profitability

Nike’s business is highly profitable with Nike’s return on shareholders’ equity hurdling the 30% mark in fiscal 2016. Nike’s return on equity has averaged more than 25% since 2012, showcasing the company’s ability to price products at a premium and drive margin expansion through technical innovation in their supply chain. A border-adjusted tax could impact Nike’s future margins. However, Nike’s position as a premium price brand and 53% non-U.S. sales reduces the tax risk.

Robust Cash Flows

During the first half of fiscal 2017, Nike’s free cash flow more than doubled to a robust $1.2 billion with the company repurchasing $2 billion of its own shares under a four-year $12 billion share repurchase program announced in 2015. Nike recently increased its dividend 13% to an annual rate of $.72 per share, marking the 15th consecutive year of dividend increases. The dividend increase together with the substantial share repurchase program reflects management’s continued confidence in their strategies to generate sustainable, profitable growth and strong cash flows. Long-term investors seeking a potential slam dunk should run to Nike, a HI-quality company with a strong global brand, consistent growth, outstanding profitability and robust cash flows. Buy.

Editor’s Note: Ingrid Hendershot, CFA is the founder and president of Hendershot Investments, an investment management firm established in 1994. She is also editor of Hendershot Investments, 1 year, 4 issues, $50, investment newsletter designed for long-term investors seeking capital growth at reasonable valuations. To learn more about the services Hendershot Investment provides visit www.HendershotInvestments.com.


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