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Is Nike a Buy?

By Lawrence Rothman, CFA - May 16, 2020 at 12:00PM

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After a nice run-up, are the shares a good investment?

Nike's (NKE 3.10%) share price still remains 10% below January and early February's low-$100 range even after sharply recovering from the coronavirus market crash that caused the stock to plummet to late March's low-$60 level. Granted, it is hard to push out this noise, but long-term investors need to concentrate on the company's fundamentals to determine if Nike is a worthwhile investment.

When people think about Nike's products, undoubtedly, its sneakers are the first thing that comes to their minds. Excluding the Converse brand, sneakers comprise 62% of fiscal 2019's revenue. But you shouldn't forget about its apparel, which is 30% of its revenue.

Clearly, the world's largest seller of athletic sneakers and apparel has been doing well and possesses some competitive advantages. Is this enough to make the shares a buy?

A runner bending and tying their shoes.

Image source: Getty Images.

Solid growth

In June 2017, management launched its Consumer Direct Offense aimed at accelerating innovation and new products. The company calls the strategy Triple Double: twice the innovation, speed, and direct connections with customers. Already known for creative products, it launched several new ones last year and recently released Air Zoom Pegasus 37.

The company was off to a good start achieving its five-year financial goals. These are: high-single-digit revenue growth; gross margin expansion of 50 basis points; selling, general and administrative (SG&A) expense leverage; mid-teen earnings-per-share growth; and a low-30% return on invested capital.

Looking at some key numbers for fiscal 2019 (ended May 31, 2019), Nike's revenue under generally accepted accounting principles (GAAP) grew by 7% and gross margin expanded by 70 basis points. SG&A as a percentage of revenue did increase partly due to higher wages related to boosting innovation, analytics, and digital platforms. These are directly related to management's strategy and achieving its top-line growth goal, which I expect will pay off down the road.

This year, results remained strong. Nike's fiscal third-quarter 2020 (ended Feb. 29, 2020) revenue rose by 5% year over year, and diluted earnings per share were up 15% versus the prior year to $0.78 after adding back a $0.25 non-recurring charge.

While COVID-19 hurt results in China and management expects store closures to dent revenue and profitability growth, I expect this will only be temporary.

It has been building out its digital platform, which will help offset some of this weakness. Digital sales grew better than 30% in the third quarter.

No one knows how long or deep the effect of the pandemic will be on business. Its global presence, with nearly 60% of its revenue generated from outside of North America, will help Nike as different countries open up and recover at different rates, however.

It is wise to bet that when normal operations resume, Nike's popular shoes and apparel will continue resonating with consumers. After all, you don't get to $40 billion in revenue without doing a lot of things right.

Building liquidity

The good news is that Nike entered the pandemic with a strong balance sheet. There was $3.5 billion of debt (28% debt/total capital) and $3.2 billion of cash and short-term investments as of the third quarter.

Operating from a position of strength allowed the company to issue $6 billion of debt in late March. True, this significantly increased Nike's debt, but it also added cash to its coffers.

Worth the price

In these uncertain times, Nike, with its popular shoes and apparel, is one company that you can count on to deliver consistent revenue and profit growth over time. I particularly like that management is not content to sit still and is pushing forward despite the challenges.

With the stock's sharp recovery, its trailing price-to-earnings ratio is 33. That means it is no longer selling at a bargain-basement price, but this is one company worth the price.

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