Last week was a tough one for Nike
Let's assess the damage. First of all, the French investigation sounds worse than it is. Nike Europe has not yet been charged with any crimes, and the accusations don't involve anything as bad as child labor, sweatshops, or even forcing Frenchmen to work more than 35 hours per week. Instead, it's about endorsements paid to professional soccer players. Nike has denied the allegations, and it is fully cooperating with French authorities. Still, this isn't the kind of news that investors want to hear, especially considering the recent weakness in the European market. However, the fallout should be minimal relative to Nike's $4 billion-plus revenues in Europe, the Middle East, and Africa. Even if Nike is found guilty, the costs (a fine, legal fees, endorsement restrictions, etc.) shouldn't amount to more than a penny per share.
The Alon International settlement, which Nike is still disputing, is another story. If the judgment stands, Nike will need to take a one-time charge to cover the millions in legal fees. Wall Street analysts are predicting that the charge will work out to $0.13 to $0.15 per share. It will definitely batter Nike's next quarter, but it shouldn't have a long-term effect on the stock. A $0.15-per-share one-time drop in the stock's intrinsic value seems far more reasonable than the $3 per share Nike's stock lost over the past week.
For long-term investors, this and any further weakness on this news could be a great buying opportunity. Nike was cheap to start with, and it is even cheaper now. The P/E of 15 is a 10-year low, and the stock last week was approaching a 52-week low. Nike is also selling at a discount to the footwear industry's average P/E of 17.5, and German rivals Puma (with a P/E of 20) and Adidas (with a P/E of 17).
Nike is not an exciting growth story in the apparel and footwear world, where companies like Under Armour
Analysts predict that Nike will earn $5.50 to $5.75 per share in 2007. If the P/E multiple expands to 18 to reflect a slight premium to the footwear industry, the stock could trade at up to $100 per share at the end of that year. At the current trading price of around $80 a share, with dividends included, that would represent a 27% return over 18 months, or 17% on an annual basis. Considering the risk profile of a dependable large-cap stock like Nike, 17% is an excellent market-beating rate of return.
Further footwear Foolishness:
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- Dirt Cheap Dream Stocks
- Under Armour, Overexposed
- New Shoes to Fill at Nike
Claim victory on our Foolish Nike discussion board.
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