Nike: Twice as Good at Half the Price?
Fools know the value of a stock split: zero. It's a nonevent. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:
- To make the stock look cheap
- To increase liquidity
- To meet stock-exchange listing requirements
- To express a bullish management sentiment
Sometimes, though, and usually for reasons not so good, companies effect a reverse stock split, reducing the number of shares outstanding and boosting the value of those that remain. Companies in financial trouble or needing to regain stock exchange compliance (or both!) effect reverse splits.
A split decision
Sneaker maker Nike (NYSE: NKE) last split its stock in 2007, the fifth time it subdivided its shares in three decades as a public company. At its annual meeting last month, shareholders approved the issuance of 750,000 new shares of company stock, paving the way for Nike to split its shares for a sixth time, most likely at the 2-for-1 ratio its typically uses. At $95 a stub, it's within striking distance of the century note that might be the key to divvying them up again.
The CFO says Nike has the flexibility now to split the stock, though he was noncommittal about whether or when the company would actually go through with it. It has in place a plan to repurchase $8 billion worth of stock over the next four years.
Earlier this summer, rival Under Armour (NYSE: UA) split its shares 2-to-1, the first time it split its stock since going public. Its shares are up 21% since then, and up 55% year to date. Its performance has surpassed that of Nike, which is stuck at virtually the same spot it started at in 2012, though it hit a peak of $114 back in May. The shares trade 16% lower from that point.
Big game hunter
The athletic gear maker is facing higher input costs for its apparel that led to gross margins contracting 80 basis points in the quarter. It also saw SG&A expenses jump as the Olympics and European football title games caused a 29% spike in "demand creation" costs, otherwise known as advertising. In fiscal 2012 it saw an 11% jump in such costs as it was pushing its NFL uniform initiative, so that suggests we should expect them to return to a normalized level fairly quickly.
With heavy expansion into emerging markets, it looks like the sportswear company is tilting the field in its favor. In local currency, emerging markets were some of the best-performing markets Nike had, with footwear and apparel growing 20% or better. Only the North American markets had a better overall performance, with total division revenues jumping 23%. Even in financially troubled Western Europe, Nike experienced a 6% increase in revenues, though the weakness of the market was apparent.
Surprisingly (or maybe not), China was the trouble spot, with growth slowing as future orders contracted 6% compared to a 1.2% estimated gain. While economists were hoping for a soft economic landing, Nike's results indicate the runway is pocked full of holes.
While Under Armour had the same problems with input costs, it doesn't have the same exposure to international markets and so the relative strength of North American economies worked to its benefit. It's the same refrain with lululemon athletica (Nasdaq: LULU) .
According to the analysts at Transparency Market Research, the overall global footwear market will grow at a rather steady pace of just 1.9% through 2018, with athletic footwear coming in slightly below that at 1.8%. Nonathletic shoes, such as those sold by Brown Shoe (NYSE: BWS) and Deckers Outdoor (Nasdaq: DECK) , actually comprise the largest segment and will see the greatest growth rates.
Yet I think Nike still has a chance to reap the biggest benefits because the Asia-Pacific region is expected to maintain its predominance, with more than 30% of the market share in 2018. Being one of the premier shoe companies along with Adidas to have a presence there, it will be a growth sector for it despite China's current weakness.
Price is what you pay
At 16 times earnings estimates it might look cheap, compared with Under Armour at 36 times estimates or Lululemon at 33, but Nike's enterprise value trades for more than 32 times its free cash flow as reported in the year-end numbers, so it's not exactly a bargain stock. Yet should Nike effect that stock split, that probably wouldn't stop people from buying in as it looks cheaper.
Even so, I marked the shoemaker to outperform the broad market averages on Motley Fool CAPS earlier this year when it was trading north of $100 a share, and I think it will return to those levels again -- at least until management splits its stock. But you can let me know in the comments section below whether you agree that Nike can continue outrunning the competition.
Split the difference
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