Nike (NYSE: NKE ) reported a great third quarter after the market closed yesterday. Because I don't want to bore you with the release data, here's what you need to know: Sales were up. Earnings were up. The stock price was up. And orders are up for the approaching quarter, compared with the same period last year.
I hadn't looked at Nike's financial history in quite a while, so I thought I'd take a peek at the figures that the Investor Relations group supplies on Nike's website. Well, it was more than a peek -- I spent two hours looking and thinking about what I saw. Here's the short version: I saw that Nike has become a better company since I purchased my shares in 1998.
Here's why. Back in 1998, the brown-shoe craze was killing companies like Nike and Reebok (NYSE: RBK ) . Sneakers were totally uncool. Timberland (NYSE: TBL ) was taking over, or at least that's what the stock chart for the comparable time period would have you think. Sales growth slowed considerably and actually declined in 1999. I estimated that Nike was worth about $60 a share and bought at around $40, or at a 33% discount to my intrinsic value estimate. Too bad the shares would fall to a low of $22 in early 2000. But I held because I was a believer in its brand, if not in my own estimate.
Check out the past decade of Nike's numbers on its website. From 1995 to 1997, Nike was a highflier. It sported great growth numbers and a great return on investment numbers. In 1998 and 1999, it hit some stumbling blocks: Revenue flailed in 1999, and investment profitability (from the perspectives of return on equity, assets, and investment capital) experienced relative declines. But look at what happened from 1999 to 2004 -- steady progress. Nike now earns ROEs (debt is 10% of total capital) and ROAs similar to its numbers in 1995 -- only today, Nike manages more than twice as many assets.
The other cool thing I found was Nike's ROICs -- check out this Excel file from Nike's website. Pretty impressive improvements, considering more and more capital needs to be allocated as a business grows, making it increasingly difficult to find similarly profitable investment opportunities.
But a question remains: Is this a new phase of higher growth with the proper infrastructure, or is this as good as it gets? That's a tough one to answer. But given that Nike's brand is catching on much faster outside the United States (particularly given increasing levels of disposable income in the Asia Pacific region), and given that Nike is expanding its product selection to a wider demographic, I would say the former is more likely. At about $87 per share, and on track to earn around $4.25 per diluted share, 20 times 2005 earnings seems like a reasonable price to me, particularly considering the margin at which Nike prices its products relative to the industry on a P/E basis. Look for a good dip in the price before making a purchase.