Nike's Not Courting Disaster

Last week was a tough one for Nike (NYSE: NKE  ) , at least in court. France is investigating Nike Europe for circumventing labor laws, and in a separate case, Nike has been ordered to pay $52.5 million-plus in legal fees to Alon International, a former owner of the South American Converse license, to settle a contract dispute. In addition, the stock took a pounding last week, dropping from $81.50 Monday morning to $78.70 when markets closed on Friday. That works out to a market-cap reduction of approximately $724 million. Is Nike really worth that much less, or is the market just overreacting?

Let's assess the damage. First of all, the French investigation sounds worse than it is. Nike Europe has not yet been charged with any crimes, and the accusations don't involve anything as bad as child labor, sweatshops, or even forcing Frenchmen to work more than 35 hours per week. Instead, it's about endorsements paid to professional soccer players. Nike has denied the allegations, and it is fully cooperating with French authorities. Still, this isn't the kind of news that investors want to hear, especially considering the recent weakness in the European market. However, the fallout should be minimal relative to Nike's $4 billion-plus revenues in Europe, the Middle East, and Africa. Even if Nike is found guilty, the costs (a fine, legal fees, endorsement restrictions, etc.) shouldn't amount to more than a penny per share.

The Alon International settlement, which Nike is still disputing, is another story. If the judgment stands, Nike will need to take a one-time charge to cover the millions in legal fees. Wall Street analysts are predicting that the charge will work out to $0.13 to $0.15 per share. It will definitely batter Nike's next quarter, but it shouldn't have a long-term effect on the stock. A $0.15-per-share one-time drop in the stock's intrinsic value seems far more reasonable than the $3 per share Nike's stock lost over the past week.

For long-term investors, this and any further weakness on this news could be a great buying opportunity. Nike was cheap to start with, and it is even cheaper now. The P/E of 15 is a 10-year low, and the stock last week was approaching a 52-week low. Nike is also selling at a discount to the footwear industry's average P/E of 17.5, and German rivals Puma (with a P/E of 20) and Adidas (with a P/E of 17).

Nike is not an exciting growth story in the apparel and footwear world, where companies like Under Armour (Nasdaq: UARM  ) are creating much of the buzz. However, Nike is still an established player, growing enough to trade at or above industry averages. Nike still sells more than 95% of its U.S. athletic shoes at price points greater than $100. The upcoming World Cup should serve as a near-term sales catalyst, and management has recently announced an increase in Nike's quarterly dividend.

Analysts predict that Nike will earn $5.50 to $5.75 per share in 2007. If the P/E multiple expands to 18 to reflect a slight premium to the footwear industry, the stock could trade at up to $100 per share at the end of that year. At the current trading price of around $80 a share, with dividends included, that would represent a 27% return over 18 months, or 17% on an annual basis. Considering the risk profile of a dependable large-cap stock like Nike, 17% is an excellent market-beating rate of return.

Further footwear Foolishness:

Claim victory on our Foolish Nike discussion board.

To sample more stellar stocks trading well below their intrinsic value, try a free 30-day guest pass toMotley Fool Inside Value.

Fool contributor and brand maven Brendan Mathews welcomes feedback at bmathews03@gmail.com. He owns shares of Nike. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 513796, ~/Articles/ArticleHandler.aspx, 10/23/2014 12:43:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement