Marcial: Going the Distance with Nike

Despite all the global economic odds, Nike (NKE) is staying at the top of its game.

Which is not to say the stock hasn't had some setbacks. Nike's shares sprinted from 39 in early March to 56 in mid-June. But they've stumbled since, falling to 51. That, however, is what loyal fans of Nike, the world's No. 1 designer and maker of top-quality athletic shoes and apparel, have been waiting for: another opportunity to snap up shares at relatively lower prices. After all, the stock traded as high as 70 last year before the market meltdown.

Some pros believe Nike is on its way to new highs. One reason: The company continues to beat all the challenges facing it and remains in good shape when it comes to gaining market share worldwide. Sales of Nike footwear and apparel continue to rise not only in the U.S. but in international markets as well. Non-U.S. sales accounted for 57% of the company's total last year. Sales are helped by the globally famous brands in the company's stable, including Converse, Cole Hahn, and, of course, Nike.

Nike's basic strategy is simple, notes independent research group Channel Trend: "It pursues promising growth opportunities by leveraging its resources, and attracts consumers with its range of premium products and services."

profits exceed expectations

"We believe Nike makes a good core stock holding for just about any type of portfolio," says Jerry W. Gray Jr. of independent research outfit Value Line (VALU). He believes the footwear giant's earnings momentum should return when the economy rebounds.

Nike's fourth-quarter revenues for fiscal 2009 ended on May 31 were lower than a year earlier because of the weak consumer environment, the negative effects of foreign exchange earnings, restructuring charges, and a tough comparison with strong sales a year earlier. Earnings for the quarter, however, came in above analysts' forecasts.

"As with the previous quarter, results exceeded our expectations," says analyst Jeffrey S. Thompson of investment firm Hilliard Lyons, who rates Nike a long-term buy with a price target of 68 a share. Given the company's strong financial condition and cash flow, says Thompson, "we believe there are growth opportunities in numerous geographic markets and product categories" that Nike could take advantage of.

With some improvement in the macroeconomic environment, he says, Nike should experience a "meaningful rebound in profits" in fiscal 2011. He figures the company will earn $3.50 a share in 2010 and $3.95 in 201l.

dividend support

The stock remains inexpensive, according to Thompson, and has underperformed the Standard & Poor's 500-stock index so far in 2009. It trades at about 14.8 times his fiscal 2010 earnings estimate and 13.1 times his 2011 projections, vs. Nike's recent historical yearly price-earnings average of 16.1, he notes.

S&P analyst Marie Driscoll, who rates Nike a buy, says "strong fundamentals and a dominant global brand with exceptional international growth opportunities" will continue to support the stock. Over the past three years, she notes, Nike has more than doubled its quarterly dividend and repurchased nearly $3.3 billion worth of its shares. The company had $2.6 billion in cash and short-term investments at the end of February 2009, she says, which should enable Nike to support its dividend yield of about 1.9%. But she expects the company will suspend its buyback program as part of a cash conservation policy.

After the stock's recent pullback, "we think the risk-reward equation has again topped in favor of long-term investors," says Sara E. Hasan, an analyst at investment firm McAdams Wright Ragen. The current valuation, she adds, has become attractive enough to warrant a buy recommendation. Hasan is among 12 of 19 analysts who have buy recommendations on the stock. Six others rate it a hold, while one recommends selling it.

Steadfast long-term investors include large institutional names like Oak Hill Investment, which holds a 7.10% stake as of Mar. 31, Cardinal Fund, with 6.57%, and Fidelity Management, with a 5.7% stake. Clearly, lots of pros think Nike is a good bet for the long run.Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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