In this article, let's take a look at Nike, Inc. (NKE, Financial), a $68.85 billion market cap company, which is the world's leading designer and marketer of high-quality athletic footwear, athletic apparel and accessories.
Widely Recognized Brand
Nike is one of the world's most widely recognized brands, which makes it has a significant pricing power. We all know that footwear and apparel are highly competitive businesses, with many producers of athletic-oriented products, but few of them can dominate like Nike does, as an example, the firm gets higher gross margins in footwear than its peers.
Innovation
Innovation in shoe production technologies continues to drive strong revenue growth. Also, marketing campaigns and recognized athlete's image, build credibility to new innovations (new products like the running shoes).
International Expansion
The Nike Brand business has six reportable segments: North America (47% of fiscal 2013 revenues), Western Europe (18%), Greater China (10%), Central & Eastern Europe (5%), Japan (4%) and Emerging Markets (16%). In China, several opportunities for expansion could arise. This is not new; Nike achieved continued margin expansion and is positioning well for improved profitability and sustained growth. It is already a leader with revenue of more than $2.4 billion in 2013 in that country.
Revenues, Margins and Profitability
Looking at profitability, the revenue growth by 10.87% has outpaced the industry average. Earnings per share increased by 2.6% in the most recent quarter compared to the same quarter a year ago ($0.78vs $0.76).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| NKE | Nike | 22.28 |
| ADDYY | Adidas AG | 14.36 |
| PPRUF | Kering | 0.44 |
| BELLY | Belle International Holdings Ltd | 17.41 |
| Industry Median | 6.66 |
The company has a current ratio of 22.28% which is higher than the one exhibit by its peers: Adidas AG (ADDYY), Kering (PPRUF, Financial) and Belle International Holdings Ltd (BELLY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 26.7x, trading at a premium compared to an average of 24.4x for the industry. To use another metric, its price-to-book ratio of 6.2x indicates a premium versus the industry average of 1.71x while the price-to-sales ratio of 2.55x is above the industry average of 0.93x. These ratios indicate that the stock is relatively overvalued.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $31.727, about a 26% compound annual growth rate (CAGR).
Final Comment
Nike's success could be attributable to product innovation, marketing and distribution strategies. Operations abroad will be a growth engine, providing opportunities for growing market share, although North America continues to post surprising revenue gains.
The innovative athletic footwear and strong brand attributes are competitive advantages that should serve the company to maintain its leader position.
Hedge fund gurus like Steven Cohen (Trades, Portfolio), John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Chris Davis (Trades, Portfolio) and Frank Sands (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
