Has Nike Become the Perfect Stock?

Before you go, we thought you'd like these...
Before you go close icon

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Nike (NYS: NKE) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Nike.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%7.3%Fail
 1-Year Revenue Growth > 12%12.3%Pass
MarginsGross Margin > 35%44.9%Pass
 Net Margin > 15%10.2%Fail
Balance SheetDebt to Equity < 50%5.2%Pass
 Current Ratio > 1.32.94Pass
OpportunitiesReturn on Equity > 15%22.7%Pass
ValuationNormalized P/E < 2024.98Fail
DividendsCurrent Yield > 2%1.5%Fail
 5-Year Dividend Growth > 10%14.9%Pass
    
 Total Score 6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Nike last year, the shoe giant has picked up a point. A slight acceleration in sales growth helped push Nike's score from 5 to 6, but it still faces plenty of competition from up-and-coming companies.

Nike played a huge role in shaping the entire athletic apparel industry and has built a ubiquitous presence in the sports world through promotional endorsements. Those efforts have put the Nike brand into the top 25 brands in the world.

But Nike isn't alone in the athletic space. Under Armour (NYS: UA) has expanded into the shoe arena and hopes to challenge Nike on its own turf. Yet Nike has such a big lead that even continued growth for Under Armour wouldn't really threaten its dominance.

Moreover, Nike's financial numbers don't blow away the industry. Both Deckers Outdoor (NAS: DECK) and Crocs (NAS: CROX) boast better net margins and returns on equity. And while Under Armour and Deckers sport higher earnings multiples, Nike still carries a premium stock price that seems to count on substantial future growth.

Where that growth may come from is China. Many brand-rich companies, including Coach (NYS: COH) and Gap (NYS: GPS) , have taken their swing at the emerging nation. Nike already has a huge presence in the world's most populous country, but what Nike sees as its biggest challenge is getting sports-watching Chinese consumers to start participating in sports themselves. If it can help through community initiatives, the moves could boost sales.

For Nike, a lot depends on the overall economy. If consumers have money to spend, then premium products like those Nike sells produce better profits for the company. But if the recovery stays tepid at best, then Nike could continue to see sluggish numbers going forward.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click hereto add Nike to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

At the time this article was published

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners