Inside Wall Street: A big leap by Nike

The world's largest maker of high-quality atheletic shoes contines to widen the lead over its rivals.

By Gene Marcial Jun 4, 2012 1:15PM
Image: Woman on rowing machine (© Jupiterimages/Brand X/Getty Images)Nike (NKE) is constantly innovating in order to keep its products No. 1 worldwide, raise its sales and profit margins, increase shareholder value and entice new investors. That's a tall order for a leader in a crowded and keenly competitive industry.
 
But it's the reason Nike is on top of its game: Its stock has sprinted way ahead of its peers' for more than a decade, soaring to a high of $114 on May 3 from just $17 in 2002. With the market hitting a rocky road in recent weeks, the stock closed at $103 on June 1. But Nike bulls see it going as high as $130 a share in a year.
 
Sales rocketed to $20.8 billion last year, from $9.8 billion in 2002, and are forecast to reach more than $24 billion this year and $26 billion in 2013. And earnings, which more than tripled from $1.23 a share in 2002 to $4.39 in 2011, are also expected to continue their upward trend.
 
Nike's big task is to continue differentiating its products from the competition's so that it can maintain this phenomenal growth. The announcement last week that the company will sell its Cole Haan unit and Umbro brand is part of a strategy to focus on growth winners: Jordan, Converse and Hurley.
 
Cole Haan, bought in 1988 for $80 million, generated sales of $518 million in 2011, while Umbro, purchased in 2008 for $582 million, had sales of $224 million. Both, however, posted losses in the third quarter of this year. "We view the planned divestitures to be net positive as management can focus on the stronger growth opportunities in the athletic and performance segments of the Nike, Jordan, Converse, and Hurley brands," says Jim Duffy, analyst at investment firm Stifel Nicolaus.  
 
The move is part of Nike's revitalized strategy to create a "sustainable competitive advantage that will result in greater separation from the competition over the next decade," says Duffy. The company is undertaking an "accelerating pace" of platform innovations; by implementing a much more mechanized manufacturing process it is effectively curbing wage costs and improving margins.
 
As part of a new "near-sourcing strategy," Nike is putting up manufacturing plants closer to major markets in North America and Europe to reduce transportation and shipping costs, as well as duty expenses, says the analyst. He sees Nike "as years, if not decades ahead of the competition as an innovator in product, supply chain, and sustainability," and expects this to translate to continued share gains and long-run margin improvement.
 
Rating Nike's stock a buy, Duffy has a 12-month price target of $123 a share, based largely on his forecast that the company will boost earnings to $4.99 a share in fiscal 2012, ended May 31, on sales of $24.2 billion, and $5.90 in fiscal 2013, on sales of $26.7 billion.
 
The stock's price premium, trading at 19 times 2013 earnings estimates compared with its peer group average of 16 times, is well deserved, says Eric Tracy, analyst at Janney Capital Markets. He cites Nike's "dominant market position fueled by industry-leading innovation, emerging market growth opportunities, and pristine balance sheet (with $6.84 a share in cash and short-term investments)." He rates Nike a buy and puts the stock's fair market value at $127 a share.
 
"Strong fundamentals and exceptional global growth opportunities" are supporting Nike's stock, notes Jason Asaeda, analyst at S&P Capital IQ, who rates the stock a buy with a higher price target of $130. While Asaeda expects the heightened economic and political uncertainty in Europe to negatively affect consumer spending there, he believes Nike's "leadership in the U.S. and growing market penetration in China and the emerging markets will mitigate near-term investment risk."
 
Asaeda expects brand momentum in Europe to build over the next few quarters, supported by planned advertising and increased promotions during the European Football Championship and the London Olympic Games. "Given our positive company outlook, we believe the stock should trade at a premium to its 10-year historical average forward price-earnings multiple of 19.3 times," he says. His price target of $130 is based on his 2012 earnings estimate of $4.97 a share and his 2013 forecast of $5.90.   


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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