Why Nike, Inc. Investors Are Getting Excited About Obama’s Trade Deal

Politics aside, Nike could make significant gains from this deal.

Seth McNew
Bradley Seth McNew
May 31, 2015 at 3:48PM
Consumer Goods

President Obama recently scored a major win as the Senate voted to continue the process of passing legislation to give him authority to complete trade deals like the current Trans-Pacific Partnership (TPP). The "fast-track" bill (so-called because it gives the president the opportunity to make trade deals happen faster than normal with fewer congressional hearings) could be a major boon for companies with international reach.

Leaving aside the political implications of this bill, the deal would likely be a major boon for Nike (NYSE:NKE) and its shareholders.

The TPP and its naysayers
In essence, the trade deal that Obama is promoting with this fast track legislation calls for more free trade with lower tariffs and other import fees for the countries involved. The deal has bipartisan support, and also bipartisan opposition -- with many in President Obama's Democratic Party representing the TPP's loudest opponents.

Proponents of the deal cite the impact it will have on allowing products to flow into the U.S. more freely and increasing international sales for American-made products. Opponents fear the negative impact (or at least uncertainty in potential impact) regarding issues like offshore labor, environmental concerns, etc. 

President Obama tried to persuade opponents saying, "What this trade agreement would do is open the door to the higher-skilled, higher-wage jobs of the future, jobs that we excel at." Nike agrees and has even put its money where its mouth is. 

Nike and Obama team up
Obama and Nike have joined teams to support the bill and publicly showcase its merits. Obama has visited the Nike headquarters in Oregon in recent months to give speeches on why the TPP is good for the U.S. economy and American companies. Nike is the perfect face of this initiative as a company that has an American product that the world wants, with international production that U.S. consumers want.

While Nike has a history of public relations issues for sending production offshore and away from U.S. factories, the company has said that if the deal passes, it will be able to create 10,000 new U.S. jobs.

Those jobs won't be in manufacturing -- Nike hasn't manufactured shoes in the U.S. in 30 years and has since moved production to 42 countries around the world. Instead, the jobs will be for higher-skilled labor.

What Nike (and U.S. consumers) could gain from this deal
International sales account for about 54% of Nike's total revenue, and this could grow with lower trade barriers. However, the best part of this free trade deal for Nike won't necessarily come from increased international sales, but instead from its domestic sales that will suddenly become much more profitable due to lower tariffs.

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Take shoes, for example. When U.S. companies manufacture shoes in factories around the world and then ship them back to the U.S. to sell domestically, they are slapped with import tariffs and fees. These fees can be as much as 30% of the total value of each pair of shoes coming from somewhere like Vietnam. On average, these fees seem to be about 13% of the total value of freight goods. 

The TPP would lower or even totally eliminate these import fees. That in turn could significantly increase Nike's gross margin on items sold in the U.S. With North American sales of about $12.3 billion in FY 2014, increasing that margin even slightly could boost Nike's bottom line in a major way.  

Nike could be in a for another growth stage. Photo: Nike.com

Time to buy Nike on this trade deal win?
Nike already looks like a buy following the most recent quarter, when Nike reported a 16% year over year rise in net income. This beat analysts' estimates and represented the third straight quarter of double digit year-over-year EPS growth. International sales, market share, and margins are already on the rise, and this deal would only make Nike's earnings power higher.

However, there are still hurdles for this bill to get passed. Now that it's through the Senate, it will be debated and voted on in the House, where it's likely to undergo new amendment requests.

But the recent Senate vote shows that there is clear support for further free trade deals and for eliminating tariffs, meaning that there is a very good chance that Nike will face easier imports in the future. This is just one more reason why Nike continues to look like a great long term play.