With no real change in company fundamentals, investor sentiment has shifted in the favor of athletic footwear and apparel provider Nike (NYSE:NKE). The shares just reached $100 Thursday; but what does that mean for those considering investing in the company?
Nike just reported second-quarter earnings that were decent, but unspectacular. Our Fool by Numbers will walk you through the details, but overall sales advanced 10% while earnings grew 12.3%; earnings would have been flat if not for a $0.13 gain from a Dutch tax benefit.
Earnings and a jovial Mr. Market have contributed to a 5% gain in Nike's stock over the past few days, and the shares are up more than 30% from their lows for the year. The earnings multiple is now 19 times, above the 14 times the shares traded at in July.
Based on next year's analyst projections, Nike trades at just under 16 times earnings, which I wouldn't characterize as overly expensive for a company that has a stellar track record of double-digit growth in sales, earnings, and cash flow.
And based on the current stock price and last year's free cash flow per share, I estimated Nike will have to grow nearly 11% per year for the next decade just to justify its price. Major inputs include a 12% discount rate and a 3% terminal growth rate after 10 years. If Nike can grow 11% for 10 years and spends the next 10 ramping down to a terminal growth rate, or the growth in the overall economy, the shares could be as much as 20% undervalued.
Clearly, thinking out to the next 20 years is uncertain, but from a discounted cash flow perspective, those years can account for a high proportion of a stock's value. That's why it's important to find a company with a long-term track record of consistent earnings growth; otherwise it's even more difficult to try to predict what's in store for the next decade or more.
At the current price there is less room for error should Nike's growth fall short of what the market is expecting. It's a close call because Nike could grow 15% or more as it has over the recent past, but there is clearly less margin of safety than when the shares traded at $80 just a couple of months ago.
Nike still has my vote for best blue chip stock for 2007, but the competition for this title is considerable and includes formidable companies such as Coca-Cola (NYSE:KO), Costco (NASDAQ:COST), PepsiCo (NYSE:PEP), 3M (NYSE:MMM), and Johnson & Johnson (NYSE:JNJ). All have proven to be prodigious cash generators and are worth adding to Foolish portfolios at the right price.
For related Foolishness:
Costco is a Stock Advisor pick. Johnson & Johnson is an Income Investor selection, while Coca-Cola and 3M are Inside Value recommendations. Whatever your investing style, we have a newsletter that's right for you!
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Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
