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3 Reasons to Buy Nike This Week

By Adem Tahiri – Mar 29, 2014 at 10:00AM

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Short-term concerns surrounding China, and competition from Under Armour, have put a lid on Nike's stock price. It's time to add this stock to your starting line-up.

Last week Nike (NKE -0.21%) reported third-quarter earnings that sent the stock down 5%. With increased competition from Under Armour (UAA -0.78%), many investors are turning away from this iconic stock.

I believe that, while Nike's stock may be down, the underlying business is actually improving. Patient shareholders who add to their positions now, are likely to be rewarded in the long-run.

 Here are three reasons you should buy shares of Nike this week.

Nike's quarter was strong
My first reason to buy Nike is very simple. Despite the sell-off, the quarter was actually pretty good.

  1. Nike's management team is ahead of consumer trends. Their direct-to-consumer plan is firing on all cylinders. During the quarter direct-to-consumer, which include sales from company-owned stores and online sales, grew 23%. This was driven by online sales growth, which registered a whopping 57% gain.  What's so exciting is that Nike's online experience offers customization that eBay and Amazon cannot. Sneaker-heads who go to can "build their own shoe," even if they choose to stitch their name inside the tongue. That's just one subtle nuance to an online strategy that is remarkably engaging.
  2. Nike actually beat analysts expectations on revenue and earnings during the quarter. Even better, the company turned in 13% top-line revenue growth, with North America and Europe growing even faster than the companies broader top-line clip. 

The above image is a pair of "LeBron's" I customized on Nike's website. The inside of the tongue, which is stitched with "Tahiri Rules," is sadly not displayed

Investors were worried about Nike's weak currency guidance, and the fact that China futures were light (down 3%). But things like currency will only effect the next few quarters. If your plan is to hold shares for years, which I strongly suggest, this will likely prove to be a buying opportunity.

Further, any short-term concerns were mitigated, by tangible success in areas that improve Nike's business in the long-run. For instance, considering where the European economy has been in recent years, I think the growth in Europe (where Adidas is particularly strong), offsets Chinese concerns a tad.  I'm not sure Europe's strength is support for China. can you connect these further? Maybe you can discuss the long-term growth drivers in each region for a Foolish stance.

Nike's Brand Advantage
One oft-cited fear is Nike's competitive position in the face of Under Armour's staggering growth. Under Armour, for the record, grew revenue 35% in its most recent quarter.

Look, Under Armour is a great company, and Kevin Plank is a wonderful CEO, but the sports apparel market is certainly large enough for two titans. 

Nike's brand is much more powerful than its competitors, whether they be upstarts or old stalwarts, nothing is quite as iconic in apparel as Nike's swoosh. In fact, in Forbes recent list of the world's most valuable brands, Nike was the one of only two apparel companies to crack the list (the other was Louis Vuitton). This brand strength gives Nike pricing power and a leg-up in new markets. 

Further, Nike's brand isn't just the "swoosh," it's built on their roster of celebrity athletes. Celebrity brands are remarkably powerful, and they have strong emotional triggers. While most celebrity brands fade when celebrities lose their "cool", Nike isn't tied to one single celebrity, it doesn't "fade" when the athlete does, therefore it can (technically) remain cool forever. 

Here's an example. At the height of their relevancy, the face of Nike basketball has shifted from Jordan, to Kobe, to LeBron. This is a healthy cycle: these athletes strengthen Nike's appeal, which leads to market share gains, and Nike's strengthened customer reach increases the likelihood that it will endorse the "LeBron of tomorrow."  This brand identity doesn't just help Nike reach more customers, it also gives them a pricing power edge on its sales, as demonstrated by its healthy net profit margin of 9.97% over the past twelve months (versus 6.96% at Under Armour). 

At some point, once it reaches domestic market saturation, Under Armour will also need a larger international presence to sustain growth.For Under Armour to gain market share over Nike in markets like China and Europe, it will need to spend money on infrastructure and advertising, capital expenditures will rise, and Nike's aforementioned edge in profitability will be better appreciated. In short, over the next ten years I think it's likely that Under Armour's growth edge will slow as it expands. Nike's edge in profitability is much more likely to stay in tact, because it's already well established overseas, and it enjoys international pricing power thanks to the recognition of its brand and stars.  

Nike billboard in Bejing, Image courtesy of Flickr/Wangfujing

Nike is on sale
Finally, you should consider buying Nike right now because it's on sale.

This is simple. Nike just grew revenues 13%, gross margins expanded 30 basis points to 44.5%, and it sells at just twenty five times earnings. In this frothy market, that's pretty cheap. 

Here's some additional context. Lululemon Athletica, a company with a very limited product line, and a myriad of management headwinds, is trading at the same multiple as Nike. Under Armour is growing faster than Nike, but it trades at a P/E of eighty and has a narrower margin of safety. 

The best investments are born when wonderful companies trade at fair prices. At twenty five times earnings, that's Nike.

Foolish conclusion: Add Nike to your starting line-up
With a fast growing competitor like Under Armour firing on all cylinders, you may be hesitant to put Nike in your starting line-up. 

But this isn't a zero sum game. Few things are as universal as sports and, as emerging middle class economies grow, there will be tremendous opportunities for both Nike and Under Armour.

For a company of its size, Nike is growing at a wonderful clip, it's growing its online business rapidly, and it's still innovating with products like the fit band. Don't let the fact that Nike has one, single, strong competitor keep you from buying its stock. 

Adem Tahiri owns shares of Nike. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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