Nike: An Olympic investment

The summer games will bring added attention to this high-performing athletic retailer.

By TheStockAdvisors May 7, 2012 11:28AM
By Amy Calistri, Stock of the Month

Nike (NKE) makes some of the most well-known products in the world. It's slogan -- "Just do it" -- has become a mantra for a generation of young athletes.

Not only are Nike's products some of the most recognizable on the planet, I think Nike stock could also be one of this summer's biggest winners. And thanks to a couple of special catalysts this stock has going for it, I think now is a good time revisit this retail giant.

First off, when it comes to athletic apparel, Nike is the market leader. Whether your sport is basketball, soccer, running, tennis, wrestling, or cheerleading -- Nike is known for its ability to provide high-performance, specialty footwear and apparel.

As a stock, Nike also delivers high performance. In the last five years Nike has delivered an annual total return of 17.5%, compared with a paltry average annual return of 1.0% in the S&P 500 Index.

More recently, Nike has performed well financially. On April 6, Nike reported the results from its third quarter of fiscal 2012 (ended Feb. 28, 2012). The company grew revenues by 15% and net income by 7% from the equivalent period a year ago.

Much of Nike's growth over the past few years has been supported by sales growth abroad.

Yes, U.S. consumers still love to spend money on sporting goods -- Nike's North American sales are up 17% -- but other countries are also growing hungry for Nike's products.

According to Nike's most recent filing, the company's emerging market sales grew to $793 million in the 3rd quarter -- a 23% increase over the same period a year ago.

In China, Nike has also become very successful connecting with the country's youth market by featuring Chinese athletes such as the 100-meter hurdle Olympic gold medalist Liu Xiang, National Basketball Association player Yi Jianlian and the 2011 French Open grand slam winner Li Na.

Nike currently sells its products in more than 7,000 stores in China, with sales of more than $2 billion annually. Recently, Nike announced it planned to more than double its revenues from China in the next four years.

Growing sales in emerging markets also hold another major advantage for Nike. Most of Nike's manufacturing is done in China and other Asian countries where currencies have been strong and inflation has been higher than in most of the rest of the world.

This has put some pressure on Nike's manufacturing costs. But if Nike sold a greater percentage of its goods into those markets, some of its margin pressures would be mitigated.

On top of the already solid fundamentals supporting Nike's share price, Nike also has two catalysts going for it that could push the stock higher in the next 12 months.

The first is a new deal that the company struck with the National Football League a few years ago. Starting this next season (2012), Nike will be the exclusive provider of NFL uniforms.

Not only will that mean more jersey sales to fans, but it puts the company's logo in front of some of the biggest audiences in the world. In 2011, nine of the 10 highest-rated TV broadcasts were NFL-related.

The second catalyst is the Olympics, as Nike also has a strong track record of beating the market during Olympic years. Since 1984, the stock has beaten the S&P six out of seven times during the two weeks of the summer games.

Once the London Olympic Games begin in July, I expect we'll see a repeat performance for Nike stock.

Of course with investing, nothing is 100% certain. Like most retailers, Nike's margins are getting squeezed by rising costs. While Nike plans to increases prices, the company acknowledges that costs could continue to rise faster than prices in the near term.

But that said, I think Nike still looks like a good investment right now. The resilience of the U.S. consumer, coupled with the company's growing market penetration abroad should continue to support Nike's share price . . . and with the Olympic torch set to leave Olympia on May 10, now could be a good time to pick up a position.

I've personally owned this company in the "real-money" portfolio for my Stock of the Month advisory for half a year now. Since I bought it last November, I'm already up 16% on my original investment. But I think this stock still has plenty of upside left.

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