For the past five decades, Nike (NKE -0.74%) has worked to build itself into a global powerhouse in the sports apparel and footwear markets. Nike has multiplied investors' money many times over since going public in 1980, and has even risen 18% since becoming a component of the Dow Jones Industrial Average almost exactly a year ago.
So how can Nike, which is already a $71 billion business as of this writing, continue to climb from here? After all, last week I explored significant risks from up-and-coming competitors, currency fluctuations, and an ongoing business reset in China.
In the interest of looking at both sides of the coin, however, here are three key reasons Nike could possibly rise going forward.
Aggressive capital returns
First, it's easy to forget that share price appreciation isn't the only way large companies can reward patient, long-term investors. If implemented correctly, dividends and share repurchases can also provide significant shareholder value.
During its most recent quarter, for example, Nike repurchased an incredible 12.3 million shares for roughly $912 million under a four-year, $8 billion repurchase authorization that its board approved in September 2012. That marked the end of its fiscal year 2014, during which Nike generated $2.1 billion in free cash flow, and repurchased 51.9 million shares for a total of $3.4 billion. That puts its average cost at $65.83 per share -- not too shabby considering the stock currently trades just shy of $82 per share.
What's more, since 1984 Nike has consistently payed and raised its healthy dividend, which currently has an annual yield of 1.2%:
NKE Dividend data by YCharts
That isn't about to change, either. Last quarter, Nike CFO Don Blair reiterated, "Our strategy, as you know, is to continuously increase the level of cash returns to our shareholders."
"Tremendous untapped potential" for growth
Next, you might have noticed last Monday, when I outlined three key risks to Nike, I intentionally didn't include "lack of growth" as one of them. That might seem strange because Nike is already so enormous, but management sure doesn't think it's a problem. In fact, Nike CEO Mark Parker emphatically stated during last quarter's conference call that he sees "tremendous untapped potential," and that there's "absolutely no shortage of growth opportunities for Nike."
Perhaps most notable among Nike's many growth drivers are its efforts to build on early foundations in areas like performance apparel -- where smaller companies like Under Armour (UAA -2.34%) currently command a large chunk of the market in the U.S., but have a limited presence elsewhere. Or consider Nike's women's segment, revenue from which it plans to increase by around 40% over last year to $7 billion by fiscal 2017.
Nike also has room to improve in markets with fast-growing middle classes like China, where it derived around 10% of sales last year even as growth remained tepid. More importantly, Nike management insists its ongoing market reset in the country is finally bearing fruit, and is setting the stage for multiple years of growth going forward.
Margins have room to expand
Finally, Nike isn't just chasing top-line growth. It also managed to increase its gross margin by 120 basis points last year to 44.8%. For that, investors can thank a combination of its ability to charge higher average prices because of product innovation and strong brands, as well as strength in its high-margin direct-to-consumer (DTC) business.
Nike has also been investing heavily in infrastructure and "demand creation" to drive that DTC business, which grew 22% last year and achieved sales of more than $5 billion. But that still represented less than one fifth of Nike's total $28 billion in revenue over the same period, so it's unsurprising that Nike considers DTC a key growth driver going forward. As Nike continues to intelligently build its DTC business from here, favorable revenue and margin trends should follow.
Foolish takeaway
Shares of Nike don't exactly look cheap, trading around 28 times last years earnings, nearly 21 times next year's estimates, and a hefty PEG ratio of 1.8. In the end, though, we're still talking about a global industry stalwart dedicated to (and capable of) not only continuing to return large amounts of capital to shareholders, but also continuing to grow its top and bottom lines at a respectable clip. In the end, that's why it seems safe to say Nike stock could easily rise from here.
