It's almost become a trend: The market keeps overlooking strong results at larger-cap growth stocks. Some have actually fallen because of concerns over shorter-term issues. Nike (NYSE:NKE) has been no exception, but it's still worth considering for disciplined investors with greater patience and a longer investment time frame.
Nike shares stumbled after earnings were issued on Tuesday; investors were disappointed by reduced first-quarter guidance and gross margin weakness. The company attributed the latter to higher oil and labor costs, which it was unable to pass on to customers through higher-priced shoes. In addition, Nike has had to increase spending to stay visible during the World Cup in Germany, home to archrival Adidas. The European shoemaker recently snapped up Reebok to become a more formidable No. 2 at Nike's heels. Nike management expects the soccer tourney to drive sales in Europe; by next quarter, we should be able to see if that held true.
Nike's weaker regions include Japan, France, and England; stronger areas include a revitalized U.S., which appears the most willing to pay up for the company's pricier shoes. But higher price tags are reportedly hurting Nike in Europe, where rivals such as Adidas and Puma are successfully selling more affordable footwear. On a happier note, sales in China are growing like gangbusters, having doubled over the last couple of years -- albeit from an admittedly lower base.
Results for the fourth quarter were strong from the sales side, rising 7.6%. Earnings were a bit more difficult to discern, due to a $0.12-per-share charge related to a ruling in favor of one of Nike's former South American licensees. Without the charge, earnings would have grown 6.9% from the year-ago quarter. Results for the full-year period were better: Sales rose 8.8%, while earnings grew an impressive 17.8%, to $5.28 per share.
It's easy to get caught up overanalyzing near-term results, so it's important to keep a longer-term perspective. As I've mentioned before, Nike is one of my favorite companies right now. It enjoys an unmatched ability to stay on the fashion forefront and churn out popular shoes and sportswear. Divisions such as Cole Haan are growing sales in the double digits, and Nike has revitalized the Chuck Taylor All-Star shoe franchise it acquired in its 2003 purchase of rival Converse. That marketing prowess has been well-reflected in the company's market dominance.
For a quick overview of the competition, K-Swiss (NYSE:KSWS) is an interesting play with a lower valuation -- one that's likely warranted, since it's a much smaller company. There's also Skechers (NYSE:SKX) and Timberland (NYSE:TBL), for a bit less exposure to sports footwear. These companies seem more susceptible to the changing whims of consumer fashion trends, and sport less impressive track records than Nike's.
Nike represents a paradigm case for Foolish investment principles. It has a leading brand with a more than 30% share of the global sporting-goods and footwear business, sells in a mass market with repeat purchasers who always need new shoes, and is very profitable, with a growing business and clear financial direction. The stock's P/E of only about 15 times trailing earnings is reasonable, especially considering that sales and earnings have grown a little more than 10% annually for the past decade. In addition, cash flow and returns on capital are as high as you'll find at any company, leading to a strong buyback program. If growth continues near its current levels, Nike will duly reward its loyal fan base of buy-and-hold investors.
Reebok was a Motley Fool Stock Advisor pick until its buyout. For more superstar picks from Tom and David Gardner, try a subscription on for size, free for 30 days.
Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
