Jump for Nike?

I'm a funny kind of investor. My head is often turned by small, intriguing companies with lots of promise, and I'm tempted to buy. But what I like to see most in my portfolio are shares of big, established companies that still have a lot of room for growth. Always keeping my eye out for such firms, I ran across Nike (NYSE: NKE  ) the other day and thought I'd take a closer look. Want to join me?

Not your Daddy's Nike
You may be surprised to find that the company isn't what you remember it as -- i.e., essentially a shoe company. Here's how it describes itself:

"Nike, Inc., based in Beaverton, Oregon, is the world's leading designer, marketer, and distributor of authentic athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities. Wholly owned Nike subsidiaries include Converse Inc., which designs, markets, and distributes athletic footwear, apparel, and accessories; Bauer Nike Hockey Inc., a leading designer and distributor of hockey equipment; Cole Haan, which designs, markets, and distributes fine dress and casual shoes and accessories; and Hurley International LLC, which designs, markets, and distributes action sports and youth lifestyle footwear, apparel, and accessories."

In his letter to shareholders in the company's 2005 annual report, Chairman Phil Knight explained how it's hard to write such a letter because "We attempt to freeze time and take a snapshot of a company that is in constant motion. It's like trying to sketch Asafa Powell running the 100m." (I confess to not knowing who Asafa Powell is, so I looked him up at Wikipedia. It turns out he's Jamaican and the current world record holder in the 100-meter dash. Before he took up running, he wanted to be an electrical engineer.)

But back to Knight. He praised the company's progress: "So what does Nike's evolution look like at this moment? Profitable. Fiscal Year '05 is a record year for sales and profitability. Again. We closed the year with our seventh consecutive quarter of double-digit earnings-per-share growth. Footwear revenues are up 11% over last year. Apparel revenues are up 10%. Equipment revenues are up 15%. A dollar invested in Nike stock one year ago was worth $1.17 at year-end."

Hmm ... this is good, but let's remember that how the stock did over a one-year period doesn't mean much. One year doesn't tell you how next year, and the years after that, will go, and that's really what should matter to investors.

Knight also noted:

• "Today Nike is the footwear market-share leader in Europe."
  
  
• "In Athens . Nike athletes won Olympic gold in every men's running event except the marathon. It would have been a sweep but for the full moon, which prompted a crazed spectator to jump from the crowd and mug race leader Vanderlei Lima."
  
  
• "This year marked the best year ever for NikeTown stores. We now have seven NikeWomen stores in key cities throughout the U.S., and one just opened in Munich, Germany. We're on firm footing with our key retail partners. And we're opening 1.5 retail doors per day in China, which helped double revenues there over last year. Any country where a 110-meter hurdler can become a national hero is a country where Nike can succeed."

Are you interested? Me, too. Let's review some pros and cons of the company as a potential investment.

The green flags
There's much to like about the company. For example:

• It's growing. Total revenues for fiscal 2003 were $10.7 billion, rising to $12.3 billion in 2004 and $13.7 billion in 2005. Gross profits rose 20% from 2003 to 2004 and 16% over the last year. Those numbers for operating income are 24% and 22% and, or net income, 28% (excluding extra items) and 28%.
  
  
• It has a commanding market presence. In 2004, its U.S. market share was 36% -- No. 1 competitor Reebok (NYSE: RBK  ) sported 12%, and Adidas 9%. (Reebok and Adidas are merging, so you might think of that as a 21% share, still well below the Nike mark.)
  
  
• It's thinking strategically and executing its plans. In BusinessWeek last year, CFO Don Blair was asked, "How do you want investors to view Nike's new business model?" His answer should cheer the hearts of investors: "The historical pattern for Nike is a bit of a boom-bust. [He noted also: 'During the 1990s, Nike averaged 15% revenue growth. But it was up 40%, down 5%.'] What we're trying to get to is more of a consumer, non-cyclical valuation or model. That doesn't mean we're ever going to be Colgate (NYSE: CL  ) or Procter & Gamble (NYSE: PG  ) . We're not ever going to look exactly like General Mills (NYSE: GIS  ) , which is growing at 8% or 9%. We're aiming for mid-teens. General Mills might have a beta of 0.6 -- they're very steady. We're never going to be quite that steady."
  
  
• It's performing well financially. Cash and cash equivalents have grown from $634 million in fiscal 2003 to $1.8 billion in 2005. There's no heavy debt burden. Inventories are growing, but not as rapidly as revenues, which is a good thing. As Blair noted, "Our return on invested capital was about 14% in 2001. But this year it's 22%. ... We raised our dividend last fall over 40%. We bought $420 million of stock last year. We're really generating a tremendous amount of cash flow."
  
  
• The brand is still powerful. According to BusinessWeek, Nike is the 30th top global brand, ahead of Canon, Google, Apple, Xerox, Avon, Porsche, Tiffany, and even Kodak. (Adidas was No. 71, and I didn't even see Reebok on the list.) Its endorsers have included small-time athletes such as Michael Jordan and Tiger Woods, and the company recently signed up young golf phenomenon Michelle Wie.
  
  
• One thing that's been helping the company is its shift toward being more of an apparel company than a shoe company. Today, shoes make up only about half of revenues, roughly.
  
  
• I also like the company's sense of social responsibility. Sure, it may not be perfect. It does contract with many factories abroad to make its wares, and not every worker enjoys the best conditions. But the company is addressing such issues. As I reported in an earlier article, "Hannah Jones, vice president of corporate responsibility at Nike, released an un-whitewashed report detailing undesirable practices, such as child labor and sexual harassment, among the company's suppliers. This is a big first step toward correcting these problems."

The red flags
Is there anything to worry about? Of course there is. Here are just a few concerns.

• The merger of Reebok and Adidas creates a bigger competitor with more market clout.
  
  
• Even as an apparel company, Nike will still be offering discretionary purchases for its customers. It's not selling medicine that some can't or won't live without. Apparel means fashion, and just as various brands are sometimes very much in vogue, sometimes they simply fall out of favor.
  
  
• Nike's dependence on inexpensive outside contractors to supply its products is a vulnerability. The low-cost supplies help the bottom line, but bad publicity about bad conditions (or something else) can hamper the top line.

Learn more
You can learn more about Nike in these Fool articles:

• Nike Still Winning
• The Next Big Bargain
• Nike's LeBron: Pure Gold?

The bottom line
I remain intrigued but, at the moment, not enough to invest. There are simply too many other interesting companies that are also vying for my dollars. If you're in the market for some other ideas, I encourage you to test drive (for free!) one or more of our investing newsletter services -- each delivers very promising ideas regularly and includes the chance to trade notes with fellow subscribers and our analysts.

To be more specific, if you're looking for income-generating stocks and aren't thrilled with Nike's 1% dividend, try our Income Investor newsletter. If you're looking for smaller, faster-growing firms, check out our Motley Fool Hidden Gems and Rule Breakers newsletters. If you're looking for some stocks that seem more undervalued than Nike, Inside Value is for you. If you need to choose some mutual funds, let our Champion Funds newsletter guide you to some great ones. Our newsletters are sporting pretty good track records so far.

SelenaMaranjian'sfavorite discussion boards include Book Club, Eclectic Library, and Card & Board Games. She owns shares of no stock mentioned in this article. Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.