Nike Inc (NYSE: NKE)
For a relatively old, mature company, Nike still moves like a young, spring chicken. At a $100 billion market capitalization, no one is going to be mistaking Nike for a hot apparel upstart like Lululemon. Yet, Nike’s operational performance and its enduring relevance in the cultural psyche of the world has allowed its stock to achieve some truly astonishing results.
By creating shoes, clothing, and other athletic apparel, and slapping their trademark swoosh on them, Nike has been able to fuel some spectacular business performance. Over the past 10 years, Nike has grown revenue from $14.9 billion to $30.6 billion, for an annual average growth rate of 7.4%. Over the same period, net income has grown from $1.4 billion to $3.6 billion, an annual average growth rate of 10%. Combined with shares outstanding dropping from 2.1 billion to 1.8 billion, earnings per share grew from $0.66 to $1.85, an annual average growth of 10.9%.
Nike has been able to keep its margins steady, with gross margin consistently around 45% and net profit margin consistently around 10%. This demonstrates the management’s ability to be disciplined with expenses and its ability to successfully market and advertise its products, creating perpetual demand. Nike has also been able to decrease its tax rate considerably from 35% to 22% over the past 10 years.
Employing minimal leverage, Nike commands consistent Return on Assets of around 15%, Return on Equity of around 23%, and Return on Invested Capital of around 20%. These numbers provide a glimpse of just how wonderful the business of athletic apparel stamped with the signature swoosh truly is. People all over the world are willing and eager to buy the products Nike makes for a premium price and allows Nike to pound out impressive profitability ratios.
All of this meant that if you had bought $10,000 worth of Nike shares in 2006, with dividends reinvested, you would have seen your investment grow to $59,145 by the end of 2015, for a total return of 19.2%. Had you not reinvested the dividends, rather spending them along the way, you would have seen your investment grow to $52,658, for a total return of 18.1%. Over this same time period, the S&P 500 returned 8% with dividends reinvested or 7.2% without.
An investment in Nike trounced the overall market as it gave over 10% more return from 2006 to 2015. This type of out-performance demonstrates the quality of the business that is inherent in Nike and the current premium earnings multiple investors are willing to pay for its shares. While, Nike is a fantastic business, ownership in the company is not cheap. While a wonderful business, the stock is a little too expensive for my tastes at these levels.
Nike is a company that you add to your watchlist and wait for the earnings multiple to drop back down to its more historic range of around 20 to 23, obviously the lower the better as long as the economic engine of the enterprise is intact. Study it, keep it in mind, and tuck it away for when the market comes calling at a better valuation. It is a tremendously impressive business, just not a tremendously impressive stock at this moment in time.
Disclosure: This author has no positions in any stocks mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.