Why You Should Look at Nike?

In this article, let's take a look at Nike, Inc. (NKE, Financial), a $78.31 billion market cap company, whichis the world's leading designer and marketer of high-quality athleticfootwear, athletic apparel and accessories.

Dominant Player

Nike is the largest and dominant competitor in the markets it operates. It is one of the world's most widely recognized brands, which makes it has a significant pricing power due to its size and well-known image. 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.

New Innovations

Innovation in shoe production technologies continues to drive strong revenue growth. Also, marketing campaigns and recognized athlete's image, build credibility to new innovations, like new running shoes, will outperform the market.

International Expansion

A long-term growth driver will be expanding operations outside the U.S. But this country still has the major revenues. Let´s see the 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 $2.6 billion in fiscal 2014 in that country.

Revenues, Margins and Profitability

Looking at profitability, revenues grew by 14.5% and led earnings per share increased by 26.7% in the most recent quarter compared to the samequarter a year ago ($1.89vs $0.86). During the past fiscal year, the company increased its bottom line. It earned $2.98 versus $2.70 in the previous year. This year, Wall Street expects an improvement in earnings ($3.59 versus $2.98).

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.

The company has a current ratio of 25.81% which is higher than the one exhibit by its peers: Adidas AG (ADDYY, Financial), Coach (COH, Financial) and Columbia Sportswear (COLM, 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 28.3x, trading at a premium compared to an average of 23.6x for the industry. To use another metric, its price-to-book ratio of 7.11x indicates a premium versus the industry average of 1.75x while the price-to-sales ratio of 2.83x is above the industry average of 0.91x.

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 $28.696, about a 23.5% compound annual growth rate (CAGR).

Final Comment

We believe Nike's success will come from operations abroad because they will be a growth engine, providing opportunities for growing market share. The innovative athletic footwear and strong brand attributes are competitive advantages over its peers that should serve the company to maintain its leader position in the future.

Hedge fund guru Louis Moore Bacon (Trades, Portfolio) bought the stock, while Ken Fisher (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Chris Davis (Trades, Portfolio), Frank Sands (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned