Nike's foolish $8 billion stock buyback

There are better uses for the athletic apparel maker's money.

By Jonathan Berr Sep 20, 2012 1:06PM
Credit: HANDOUT/Newscom/RTR/ReutersWhen Nike (NKE) announced Wednesday that it plans to buy back $8 billion in company Class B shares over the next four years, CEO Mike Parker described the move as "a prudent use of our cash."  

CEOs usually make similar comments about buybacks, but in Nike's case, investors shouldn't take the company's word.

Yahoo pundit Jeff Macke correctly noted in a tweet that "a huge buyback w/ shares $10 off all-time highs is foolish." Indeed, Nike shares are trading at a price-to-earnings multiple of 20.65, near their five-year high of 22.86, according to Reuters. Wall Street analysts have an average 52-week price target of $106.07, about 9% higher than where the stock currently trades. That forecast, however, may be wishful thinking, given Nike's recent struggles. Its shares have barely budged this year.

Nike is buying back shares because it doesn't have better ideas about how to deploy its cash. Macke told me via Twitter that Nike could have used the money to develop in-store shops, hike its dividend, make an acquisition or simply do nothing. I would add paying down debt to the list.

Acquisitions, though, seem like a good bet for the athletic apparel maker. Nike, sitting on about $2 billion in cash, could easily afford to buy rivals such as trendy yoga apparel maker Lululemon Athletica (LULU), which has a market cap of about $11 billion. There are cheaper options, such as Crocs (CROX) and Sketchers (SKX), which each have market caps of about $1 billion.

Investors view buybacks the same way kittens look at tin foil balls -- shiny objects that hold their attention for a few seconds at most.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr. An earlier version of this story incorrectly described Jeff Macke as CNBC pundit.

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Sep 20, 2012 3:35PM

The bust is coming! Told ya so!

I saw an article on yahoo page and it said that Bernanke would ruin the U.S. by 2013 by giving the Billions and Billions to wall street. I wrote to Bernanke, the fed, the white house, and Obama and told them we need to get rid of him and the whole administration before they run the U.S. into bankruptcy.

Get the feds out of wall street and let the chips fall as they may. If it were your own business the feds wouldn't send you billions, so why should they give wall street money to keep making profits? If threy fold then let them fold!@!!!!!!

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