Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) once owned a lot of Nike Inc (NYSE:NKE) stock. Almost eight million shares before selling at the end of 2010. Now that NKE stock has cooled off, it’s time for Warren Buffett to take another kick at the cat. Only this time he shouldn’t just buy a few measly shares — he should buy the whole darn thing. Here’s why.
Berkshire Hathaway owned Nike stock for five years starting in the fourth quarter of 2005 and ending in the fourth quarter in 2010.
NKE stock in that time traded between a high of $23.12 and a low of $9.44. When he first acquired shares in the sports apparel and footwear giant they were trading between $10 and $12. BRK sold about half the shares in the third quarter of 2010 and the rest in the final quarter of the 2010 fiscal year at prices between $17-23.
In the five years he owned NKE stock, its price-earnings ratio averaged 18.8; today, that multiple is around 23, considerably higher than when BRK held it. More to the point, it’s lost out on $223 million in dividends and capital appreciation through Nov. 8.
Why did BRK sell Nike stock? Because Lou Simpson, Buffett’s investment guru at Geico was retiring: “I never inherit my investment decision from somebody else,” Buffett stated in a March 2011 appearance on CNBC. “So When Lou left, his portfolio left.”
NKE stock is down 19.4% year-to-date and looks on course for its first year of negative returns since 2008 when it lost 19.2%. Nike stock might still appear expensive, but it doesn’t suffer many down years … so if Buffett wants back in, now would be as good a time as any.
Brooks Isn’t Nike
Berkshire Hathaway’s Fruit of the Loom acquired Brooks Running Co. in 2006, five years removed from nearly going bankrupt. Focusing exclusively on running shoes, CEO Jim Weber was able to bring it back to life. So successful was Weber that Berkshire Hathaway separated Brooks from Fruit of the Loom in 2012, making it a standalone company.
As running shoes go I’m sure they’ve got an excellent product. However, its revenues in 2014 were $500 million and likely no more than $600 million today. Nike’s revenues in fiscal 2016 were $32 billion with free cash flow almost four times Brooks’ revenue.
If Buffett wants elephants, Nike’s certainly a candidate.
A Family-Run Company
Although, the founder of the company retired from Nike’s board at the end of June, his son Travis Knight will continue to represent the family’s interests on the board. In addition, he’s been appointed Chairman Emeritus, which allows him to attend any board meeting he chooses to and comes with a $500,000 annual salary.
At age 78, he might be slowing down, but you’re not going to keep such a passionate entrepreneur away from his baby for too long — Knight and family own approximately 26% of Nike’s stock — so this is a good way to ensure he remains involved with the company while being able to focus on other things he’s passionate about, such as Oregon Ducks football.
Buffett enjoys acquiring family-run or family-founded companies, so Nike would certainly be a natural candidate. In addition, Mark Parker’s been in the CEO job since 2006, so he’d be getting a no-muss, no-fuss type of company.
Bottom Line on NKE Stock
Berkshire Hathaway’s biggest acquisition to date is last year’s $37 billion purchase of aerospace parts maker Precision Castparts. Before that, it was the $27 billion purchase of Burlington Northern Santa Fe. While Buffett is famous for saying he’s looking for elephant-sized acquisitions, taking down Nike would likely cost Berkshire Hathaway $100 billion or more.
Theoretically, it’s possible that BRK could do the deal without assistance from partners such as 3G Capital, but there would have to be debt involved as it only has $85 billion in cash and it certainly wouldn’t burn all of that on one deal.
Currently, its various businesses have approximately $100 billion in loans outstanding. If BRK was to pay $100 billion for Nike (20% cash, 80% debt) its debt would still only represent about 26% of its total assets.
However, when Phil Knight stepped down from Nike’s board, he created Swoosh LLC, a limited liability company intended to influence the long-term direction of the company and making it nearly impossible for someone to buy the company without his approval.
So, it’s a bit of a pipe dream to think something will happen on this front. That said, there’d be no better group to secure the future of Nike than Berkshire Hathaway and it would make a great feather in the cap of one of the world’s best investors.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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