Why This Unusual Miss Is a Long-Term Investor's Big Opportunity

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Woe betide the investor darling that misses its estimates. Nike (NYS: NKE) rattled the market by falling notably short of the earnings it was expected to net. This was uncharacteristic for the company, a serial estimates beater, so its shares got roughed up in after-hours trading. Nike has been an investor favorite for a long time. Hopefully for the previously smitten, the romance isn't over yet.

Always expected to be a champ
Nike's revenue for its fiscal fourth quarter was more or less in line with expectations at $6.5 billion. It was net that disappointed, coming in at $549 million on the back of higher raw materials prices and other factors that affected costs. That meant EPS of $1.17, or a full $0.20 short of the expected $1.37. The net figure was also down a bit from the $560 million the company earned the previous quarter.

That quarter-on-quarter drop in bottom line was Nike's first since 2009. Compounding this, the company has a miles-long track record of meeting or beating estimates; prior to this set of results, it had done so in 22 of its previous 23 quarters. In other words, for over five years. Not many publicly traded companies -- or private ones, for that matter -- can say the same.


It's no wonder, then, that Nike's shares stumbled by 13% in after-hours trading following the earnings announcement. The market isn't used to any significant disappointment from the company. Nike, then, is a victim of success. Few enterprises, no matter how well run, can satisfy high expectations each and every reporting period. Everyone has a bad quarter once in a while.

Don't panic
In spite of the earnings miss, Nike's quarter wasn't a disaster. Yes, net was down, but the drop was hardly tragic, at 2% quarter on quarter. That's too slim a percentage to deserve the pummeling the stock received after the market close.

There weren't really too many scary numbers in the latest set of figures, save for a rise in inventory. Over the one-year period ending May 31, that metric grew 23% to total $3.4 billion. OK, that's not encouraging, but at the same time it's hardly enough to yell "Fire!" in a crowded stadium. Revenue for fiscal 2012 came in at $24.1 billion, which was 16% more than that of the previous year. Inventory growth exceeding that of revenue by 7 percentage points, while certainly a cause for concern, can't be considered out of control.

Getting richer and less indebted
That full-year revenue figure was, incidentally, the highest in the company's history, a lovely note that was drowned out by the shrill panic over the quarterly figures. Meanwhile, none of the other important full-year numbers look all that bad and some are quite good. Net margin was down but not worryingly so; it came in at 9.1% for fiscal 2012, as opposed to the 10.2% of last year.

Nike's light debt burden got even lighter, with long-term obligations dropping 17% to $228 million over the same time frame.

Meaning the firm now has over 10 times more of the green stuff than it has debt. That's a fine position to be in, particularly for investors. Nike's dividend probably isn't going anywhere and it might even increase, which would be a good move for the company if it's eager to wipe the memory of this earnings report and/or boost its stock price.

Several paces ahead
Nike is still lapping the competition -- there are few, if any, better stock buys in the athletic apparel game. Earlier this year, for example, the company replaced its longtime rival adidas (OTC: ADDY.PK) as the official outfitter and fan apparel purveyor of the NFL. There are a lot of teams with a lot of players in that league, not to mention armies of fans, and Nike's got them all locked in thanks to its five-year exclusivity deal with the league.

It's also got a far-ranging product line running the gamut from socks to baseball gloves to golf hats, making for a huge catalog that companies focused on narrower segments of the market can't touch.

Besides, even those more focused players -- some of which have been investor favorites recently -- have neither the long record of success nor the attractive valuations enjoyed by Nike. Under Armour (NYS: UA) has been showing healthy growth rates of late and boasts good future potential, but its stock looks expensive at a one-year forward P/E over 30, against expected EPS growth of 24% or so.

The same can be said of yoga clothing specialist lululemon athletica (NAS: LULU) . Even after its stock got a Nike-style pounding on the back of speculation that notorious short-seller David Einhorn had bought a stake, it looked overpriced. Its one-year forward P/E is 28, while EPS growth is anticipated to be 19%.

And those figures for Nike? Based on the stock's most recent closing price, the numbers are 14.5 and 20%. Plus, don't forget that the company pays a dividend that might just rise in the near future. Last but not least, it's consistently profitable and there's no reason to suspect that'll change anytime soon. So it had a bad quarter, who cares? Nike's a long-term winner. Never count it out.

In its sector it also dominates not only its domestic market, but the world. For those who like such global success stories -- and what red-blooded investor doesn't? -- we feature several of them in our FREE report "3 American Companies Set to Dominate the World," which is a mere click away at this link.

The article Why This Unusual Miss Is a Long-Term Investor's Big Opportunity originally appeared on Fool.com.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Under Armour and lululemon athletica. Motley Fool newsletter services have recommended buying shares of lululemon athletica, Under Armour, and Nike. Motley Fool newsletter services have also recommended creating a diagonal call position in Nike and a bear put spread position in Under Armour. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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