Is Nike the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Nike (NYSE: NKE  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Nike.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 6.7% fail
  1-Year Revenue Growth > 12% 4.6% fail
Margins Gross Margin > 35% 46.5% pass
  Net Margin > 15% 10.1% fail
Balance Sheet Debt to Equity < 50% 6% pass
  Current Ratio > 1.3 3.35 pass
Opportunities Return on Equity > 15% 20.8% pass
Valuation Normalized P/E < 20 26.23 fail
Dividends Current Yield > 2% 1.5% fail
  5-Year Dividend Growth > 10% 16.7% pass
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Nike's score of 5 puts it in the middle of the pack. Although the athletic shoe and apparel maker has maintained its dominant brand, it faces slowing revenue growth and increased competition.

With Nike among the top 25 best global brands, Nike the company has worldwide demand to capitalize on. Its sales are a picture of the global economy, with about 35% of revenue coming from the U.S., while growth in China and other emerging markets has helped offset stagnant sales from North America and Europe.

But the company faces a host of smaller competitors. Under Armour (NYSE: UA  ) , for instance, has penetrated the athletic apparel market ambitiously, with 30% annual sales growth since 2005. It's also going head-to-head with Nike with its own athletic shoes. But it still lags Nike in return on equity and operating and free cash flow margins. Similarly, Skechers (NYSE: SKX  ) and Deckers Outdoor (Nasdaq: DECK  ) have been growth darlings in the shoe space, and even Crocs (Nasdaq: CROX  ) has come back from near-oblivion to post good earnings results lately.

As the mature company in the sector, Nike has a lot to offer investors. The company has raised its dividend for nine years straight. The biggest concern is a somewhat high valuation compared to slow growth, but if Nike can keep leveraging its brand in emerging markets, sales could catch up to its earnings multiples quick enough to justify a rich stock price. Nike isn't perfect, but it's in a good position to benefit from a global recovery.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Nike to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Nike is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Under Armour, which is a Motley Fool Rule Breakers selection and a Motley Fool Hidden Gems selection. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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