Nike's High Jump

The Motley Fool has been on a bit of a sporty shoe binge over the past several months. While sports retailers such as The Sports Authority (NYSE: TSA), Dick's Sporting Goods (NYSE: DKS), and Finish Line (Nasdaq: FINL) might be all over the map with their results, manufacturers have looked like good opportunities. Reebok (NYSE: RBK) has been highlighted as a bargain, and Hidden Gems pick Saucony (Nasdaq: SCNYA) (Nasdaq: SCNYB) is not only growing but also producing great free cash flow and selling at a discount, all while courting a takeover. Should industry gorilla Nike (NYSE: NKE) be on our short list as well?

At first glance, it certainly looks that way. Today, the bad boys from Beaverton released first-quarter results that show Americans can't get enough of the swoosh, and they put rival Reebok to shame. U.S. revenues outpaced growth across the globe (even though those were juiced by foreign exchange gains), climbing 12%. Total revenues were up 18% to $3.56 billion. That helped propel net earnings to $1.21 per share, a 23% better showing than last year.

While the release is quick to point out the 1.5% improvement in gross margin, there are a few rocks in Nike's shoe this quarter. Selling, general, and administrative expenses ticked up 1.4% as well. It's not enough to offset the margin gain, but it does bear watching.

Nike's balance sheets remain as shock-absorbent as its famous air sole, with about $1 billion in cash and short-term investments to offset the $692 million in debt.

The question for Nike watchers always comes to: Is it worth the price? With one of the world's most recognized brands, and future orders up 10%, it seems to have earned a premium valuation of 22 times earnings, which puts the stock near its 52-week high. Often in the past, that meant not much of a discount and no real reason to buy.

But these days, the $78 per stub values the enterprise at only 15 times last year's free cash flow. That's plenty of green for future stock buybacks or dividend increases, and it suggests that Nike should be a rewarding investment even at today's prices.

Seth Jayson doesn't wear Nike shoes, but Beaverton does make the best pair of sunglasses he's ever owned. At the time of publication, he owned shares of Reebok but had no position in any other firm mentioned.

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