I have to admit that I never expected Nike Inc (NKE) to remain as robust as it has been, for so long. To me, Nike and NKE stock meant one thing: sneakers. The shoe market is effectively commoditized, so the only differentiation really comes from marketing, price points and salesmanship.
When you walk into any shoe store of any caliber these days, the salesmen can boggle the mind with talk about all the features of any given shoe. I just bought a pair of Nike Monarchs to replace the ones I had for one simple reason: they still feel the best on my feet. I suspect that’s true for most people.
Of course, Nike has expanded beyond shoes into every aspect of sportswear — which is also a competitive market. That market is also driven by hype, i.e. marketing, and is also commoditized.
Yet somehow, Nike and NKE stock have always been in a full-court press and continue to succeed. Its all-time high was just this past year in 2015, and NKE stock is only 20% off that high.
Here’s what we do know: Nike is probably the top marketing sportswear company out there. Everyone knows the “Swoosh.” Their commercials continue to amaze. Their sponsorships are always the talk of the sports world. Do you see slick and sexy Under Armour Inc (UA) commercials during the Super Bowl?
See, the problem with Nike’s competitors is that they may do many things very well, but they cannot compete with Nike’s financial position — which gives it an advantage in both marketing and pricing. Nike has $5.1 billion in cash and only $2.05 billion in debt. It generated $3.7 billion in free cash flow in FY15.
Under Armour had negative free cash flow of $342 million. It has only $129 million in cash and $627 million in debt it must service. It made $250 million last year compared to Nike’s $3.2 billion.
There’s no contest. Nike can simply outspend Under Armour. In a commoditized sector, it’s marketing that wins the day.
That brings us to the question of valuation: NKE stock trades at about 25 times earnings; net income increased 20% from FY14 to FY15, and it appears NKE stock may be on track to repeat that this year. As readers know, when I see a world-class company with outstanding free cash flow, plenty of net cash and a growth rate of 15%, I am willing to pay for that company. I assign 10% premiums to each of these elements, meaning NKE stock is a buy at 28 times earnings.
So, much to my surprise, NKE stock does fit that model. I find it hard to believe that, after all these years, NKE stock remains a growth stock consideration for a long-term diversified portfolio … yet the numbers work.
But with Nike, it is more than just the numbers. Nike understands its market, caters to it, and appears to have figured out the commercial messaging that resonates with people.
I’m not quick to make comparisons to other companies, but it says a lot that a company like Gap Inc (GPS) can see its brand shrivel up and die, overwhelmed by competition, while Nike just keeps running the marathon to win.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
