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Nike, Inc. Message Board

  • soma022 soma022 Sep 28, 2012 1:07 PM Flag

    $8 billion buyback will support shares

    From the website TheBigStock:

    Nike released earnings after the bell last night, and while the company beat by a wide margin, the shares are down 3% in pre-market trading. Shares are down 20% from their highs hit earlier this year, so is now a good time to buy the stock? First let’s look at the numbers. Earnings came in at $1.23 a share on revenue of $6.7 billion, estimates were for earnings of $1.12 per share and revenue of $6.4 billion. Revenue grew 10% year over year, while income declined 10%. So clearly there is some margin issues at the company, as they are struggling with higher labor and material cost.

    The company also has relied on China for growth, yet future orders from that region are expected to decline 5% in the short term, that would be the first decline in 3 years. However, Nike expects overall future orders to increase 6%. So basically everything seems fine with the company, and it’s things outside of their control that they are having issues with.

    China is starting to open the floodgates with stimulus, as the country has been suffering a large slowdown as a result of the government trying to curb growth and inflation. Unfortunately, increasing material and labor cost are only going to get worse. That is what happens when you have Central Banks around the world flooding the system with newly created fiat currency.

    In other words, expect these increasing cost to continue, and expect price increases from Nike to offset these rising cost. A $200 pair of Nike shoes might not seem so expensive a few years from now, given the amount of inflation that will probably occur.

    So let’s get back to the stock. Is it time to buy? Well, the stock is now where it was last year, so it’s not a bad entry point. However, it’s not at a compelling valuation just yet. Earnings are expected to be just over $5 for the year, which gives it a p/e of 18. Growth in earnings next year is estimated to be 15%, so the shares are slightly above fair value. At $80 the stock becomes more interesting, it’s at $92.50 right now.

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    • But this is Nike we are talking about, this is like buying Coke 50 years ago. Just buy it, put it away, and forget about it. Come back in 10 years and the stock will be way up. I mean look at this long-term chart of Nike. Is that impressive or what?

      The company itself could probably support the stock price in the short term, given the massive buybacks they have been doing. Last quarter Nike repurchased $779 million of shares, as part of its $5 billion 4-year share repurchase program. The company has now completed $4.9 billion of that. So is that the end? Nope. Nike follows up that $5 billion repurchase with a new 4-year $8 billion repurchase program. That’s a lot for a company with a $42.5 billion market cap, almost 20% of its market cap actually.

      Most companies do buybacks that amount to maybe 5% of the outstanding shares, which is a waste of money in my opinion since it barely makes an impact to earnings or the stock price. When you get to 10% or more in a buyback then you are talking some serious differences in earnings and share price. In other words, expect the chart above to continue to move up and to the right.

      Nike is basically using most of its cash flow for these buybacks, and their balance sheet is exceptional right now with over $3 billion in cash and only a couple hundred million in debt. Given their income, the cash balance will remain steady and probably increase even with this new $8 billion buyback program.

      While the shares might be under pressure this morning, I think a lot of the froth has been taken out of the stock already. While the stock isn’t cheap, I doubt it moves much lower. I wouldn’t be a buying right now though, unless in goes down to about $80, which I’m not sure can happen given the massive amount of shares the company is repurchasing.

      So Nike seems to be doing things right at the moment for its shareholders. The things it can’t control, growth in China and material cost, are weighing on the company right now.

96.16+0.31(+0.32%)Jan 23 4:00 PMEST

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