The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Nike , the shoe company.
Nike by the numbers
Here's a quick snapshot of the company's most important numbers:
Result (Most Recent Available)
Growth rate (MRQ)
Under Armour adidas
Sources: Yahoo! Finance and company press releases. MRQ = most recent quarter.
Here's what we think of this shoe brand.
Nike has had a tremendous history of growth in a market that seems to be more competitive every day. Since the handshake agreement between Phil Knight and Bill Bowerman in 1964, the company has gone from an idea in their heads to a dominant brand in nearly every sport imaginable. Over the past 20 years the company has managed to grow revenues almost like clockwork, and investors have been rewarded as a result.
Nike's amazing ability to stay relevant in the face of changing consumer tastes is what has set it apart from Reebok, Converse, and other brands that go from in-style to out-of-style overnight. Nike has been able to transition from Air Jordan to the "Bo Knows" campaign to the everlasting "Just Do It" that can still be seen in its ads.
Nike has also refrained from following fads that seem to take the attention of consumers momentarily. Crocs, for example, gained a foothold in the shoe market with gimmicks or quick fads, and Nike barely responded, allowing the company its moment in the sun. But do we really think Crocs is going to challenge Nike in footwear long-term?
Under Armour does pose the greatest risk to Nike long-term, but I think there's room for two in this game. Since Under Armour hit the scene, I actually think it's made Nike step up its game from both a quality and design perspective.
My only question is whether or not Nike is worth 24 times trailing earnings with a growth rate of just 7.4% in the most recent quarter. Normally I would say no, but in the case of Nike I think the brand will keep the company profitable and relevant far longer than most companies. It's like buying Coca-Cola; you buy the stock for the brand, not just the earnings. In 20 years, Nike will still be around, and that has me confident in an outperform call.
Travis is right that Nike has a long proven track record of growth in a competitive industry. But is that growth speeding up? Slowing down? A great investment is more than just a big brand name, especially in fashion and fitness, where tastes can change easily from year to year. To see how Nike's progressed over time, I put together a little chart that shows the company's annualized growth rates in several key metrics across several time periods, beginning with a 15-year time frame and ending with a one-year period:
Net Income CAGR
Free Cash Flow CAGR
Total Return CAGR
Sources: Yahoo! Finance and YCharts. Calculated from relevant trailing-12-month results. Financial metrics begin at Q3 of start period (1997 for 15 years, etc.). CAGR = compound annual growth rate. NM = not material; start period begins with negative result.
With the exception of the past four quarters, Nike has shown a consistent ability to increase its shareholder return in excess of its key financial metrics. It's worth asking whether this more recent time frame represents a temporary dip or the new normal.
Part of this outperformance can surely be credited to Nike's commitment to dividend increases. Since 1997, dividend payouts per share have increased 600%, while remaining sustainable at a free cash flow payout ratio of under 50% the entire time (except for one brief recessionary spike in 2009). That gives Nike a double edge over Under Armour and lululemon athletica , neither of which pay dividends, both of which sport P/E ratios nearly double Nike's, and both of which have much narrower free cash flow margins than Nike:
Price to free cash flow
Free cash flow margin
Sources: Yahoo! Finance and YCharts.
Lululemon has superior margins right now, but it also has much higher valuation ratios -- and, perhaps more important, it remains focused on a segment into which both Under Armour and Nike have been busily making inroads. Under Armour's margins are weaker than Nike's on both counts, and as Travis mentioned, its competition has forced Nike to step up its game.
It's the results of that stepped-up game that most interest me. Nike, more than any other fitness company, has embraced wearable computing and high-tech workout solutions. I've actually predicted that wearable computing will be one of the biggest tech trends of 2013, and if Nike is committed to pushing the envelope on the fitness side, that should give it another long-term edge over other sportswear companies with less intelligent gear.
I see greater gains in 2014 and beyond as Nike becomes more of a go-to wearable computing company for fitness enthusiasts, but 2013 should see Nike return to its mean performance -- enough to beat the indexes, at least in my estimation. Nike's average P/E over the past 10 years is 19.5, which is skewed lower (as every stock was) by the 2008 crash. It's a bit higher than normal, but not by much.
Taken all together, these facts push me from the fence to the field, and I'm willing to give Nike an outperform call today. It's not a stark raving buy, but it's better than most of the alternatives, particularly as sticker shock now appears to be holding its two high-flying peers back.
You won't get any fancy riddles or long-winded stories from me on Nike -- this is one of the premier retail names. Period!
The way I see it, Nike does three things better than just about any other footwear or athletic retailer out there.
First, Nike utilizes its brand value like very few other corporate entities. Travis mentioned Coca-Cola, and I think that's a pretty similar example that encompasses Nike's well-known image worldwide. Nike's products are innovative, and its management team quick to respond to changing consumer demands. Like all retail, it'll suffer from hiccups, as it did last year when slower sales in Asia cut into its bottom line and caused a rare earnings miss. Overall, though, Nike understands how to use its brand value to get consumers to want its product and to pay more than for its peers' products to get it.
Second, Nike is a master at securing long-term lucrative partnerships. Nike pushed Under Armour out as the primary outfitter of the National Football League this year and partnered early on with Apple in 2006 to roll out a Nike-based iPod geared toward athletes. Nike's management can recognize a trend early and react very quickly to it long before its competitors even have a chance to react.
Finally, Nike has a knack for hiring successful ambassadors of the brand. In basketball, Nike has a partnership with superstar LeBron James, and in golf, the athletic and footwear company has held a partnership with Tiger Woods, and just recently signed Rory McIlroy, who's currently ranked No. 1 in the world, to a lengthy contract. With visible brand ambassadors come millions of impressions, which is great for Nike's brand value.
What Nike does isn't rocket science; it's just managing a top-tier brand name to the fullest. Nike's grown its quarterly payout by an average of 19.6% over the past decade and is projected to grow by approximately 10% a year over the next five years. Although 18 times forward earnings is hardly "cheap" in the retail world, factoring in the three components above allows me to easily recommend an outperform CAPScall on Nike.
The final call
That's a rare consensus for an outperform call for Nike in our CAPS portfolio. So far, we've outperformed the market by 202 total points in our 21 picks, so check out what other stocks we like here.
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The article Analysts Debate: Is Nike a Top Stock? originally appeared on Fool.com.
Fool contributor Alex Planes has no position in any stocks mentioned. Fool contributor Sean Williams has no position in any stocks mentioned. Fool contributor Travis Hoium owns shares of Apple. The Motley Fool recommends Apple, Coca-Cola, lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Apple, Crocs, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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