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Integer Investments: Nike Is Now a Buy

- By Cristiano Bellavitis, Ph.D.

We think Nike (NKE) is a great business at a fair price. We have been waiting for Nike's price to come down for a long time and in the meantime have sold put options, though unfortunately these options have never been exercised (but we cashed-in premiums). Now we have bought the stock.

The stock price has declined due to increasing competition in the space. Of course, competition is there, but is there any industry where there is no long-term competition? Under Armour (UAA)(UA), Adidas (ADS) and Lululemon (LULU) are all good companies, but they have always been there. Under Armour and Lululemon are perceived as new entrants, but they were actually founded 20 years ago (in 1996 and 1998). Adidas is almost a century old while Nike is "only" 52 years old. So what has changed? These industries move in waves, but the quality of the Nike brand, its management and innovation have been a constant.


Why we like Nike

Business model: If you think Nike is a sports company, well you are (partially) wrong. Nike is a design and marketing company. Nike does not produce its products, and its key competitive advantage is its ability to be a slim, cool and innovative company that partners with world famous athletes. Nike has maintained its leadership position due to its continued focus on design, research and development.

Innovation: Nike filed for 541 patents in 2014 and 687 patents in 2016. Nearly 80% relate to four key areas: footwear, apparel, data and manufacturing (source:BizJournals).

Nike continues to innovate and it recently launched the Hyper Adapt, self-lacing shoes inspired by the movie "Back to the Future." These shoes are currently priced at $720 and are a niche product, but they show that Nike is a market leader in this industry in terms of innovation.

Brand: Undoubtedly, Nike is one of the most recognizable brands in the world. According to Forbes, Nike is the 18th most valuable brand in the world with a value of $27.5 billion. By comparison, Adidas is number 90 and worth $7 billion. More importantly, compared to a year ago, Nike's brand value has increased by 5% while Adidas increased by 2%. Under Armour? Not in the top 100.

Interbrand assigns similar values but finds that, over 12 months, Nike's brand increased in value by 16% while Adidas decreased by 8%. How about new generations and social media? Nike has, by far, the greatest number of Instagram followers compared to all brands (not only sports; source: Statista). Nike has 65 million Instagram followers versus 15 million for Adidas. Read this article to appreciate Nike's Instragram success.

Management and shareholder friendliness

It is well known that Nike's management is top-notch. Mark Parker, the CEO since 2006, has been with Nike since 1979. Under his 10-year tenure as a CEO, Nike's revenues and profits have tripled. He owns almost 2 million shares in Nike, a personal commitment of $100 million.

Over the last decade, Nike's shareholders have been rewarded by a stellar stock performance, buybacks and dividend increases (source:GuruFocus).

Over the last 10 years, Nike's dividend increased from 26 cents per to 72 cents. It currently offers a 1.4% yield, not extraordinary but interesting considering its past double-digit growth. Nike has also repurchased a large number of its own shares. In 10 years, its share count decreased by approximately 22%.

Profitability

Nike's business model ensures strong and consistent profitability. For its size, Nike is also very agile and its performance metrics are great: return on equity of 30.2%, return on assets of 12.4% and return on capital of 26%. How does this compare with its competitors such as Skechers, Lululemon or Under Armour (source:Simply Wall St and 4-traders)?

ROE

ROA

ROC

Nike

30%

12.4%

26%

Skechers

20%

12%

22%

Lululemon

25%

17%

31%

Under Armour

15%

8.1%

15%

Adidas

17%

7%

18%



How about margins? Nike has an operating margin of 14% (growing), while Skechers boasts 10.6% (growing), Lululemon has 18% (declining), Under Armour has 9% (declining) and Adidas has 7.5% (growing). Hence, based on these metrics, the only company that is in a slightly better shape than Nike is Lululemon.

Valuation

However, Lululemon is valued considerably higher than Nike:

  • Price-earnings ratio 2017: Lulu 29, Nike 21.8
  • EV/EBITDA 2017: Lulu 16, Nike 15.2
  • EV/Sales 2017: Lulu 3.5, Nike 2.3



The only stock that seems to offer great value is Skechers. We value Nike at $65 per share. We expect a long-term growth above 5% and a WACC of 7%. At current prices, Nike is a buy.

Conclusion

Nike is not cheap and is not on sale, but it is a great company at fair value. The company has an outstanding track record, top-notch management that rewards shareholders, a strong brand, balance sheet and profitability. Now it is discounting some temporary weakness in the U.S. and competition from the likes of Under Armour is gaining market share, but Nike is a great and innovative company that will thrive in the long term. We started a position today.

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This article first appeared on GuruFocus.