Integer Investments: Nike Is Now A BUY, Target Price: $66

By Integer Investments

• Nike is great company, but over the last year its stock has declined 19%. It is now fairly valued and offers the opportunity to start a position.

We think that Nike is a great business at a fair price. We have been waiting for Nike’s price to come down for a long time and meanwhile, we have sold PUT options, though unfortunately these options have never been exercised (but we cashed-in premiums). Now we have bought the stock.

The stock price has declined due to increasing competition in the space. Of course, competition is there, but is there any industry where there is no long-term competition? Under Armour (UAA), Adidas, Lululemon (LULU) are all good companies, but they have always been there. Under Armour and Lululemon (LULU) are perceived as new entrants, but they were actually founded 20 years ago (in 1996 and 1998), Adidas is almost a century old, while Nike is “only” 52 years old. So, what has changed? These industries move in waves, but the quality of the Nike brand, its management, and innovation have been a constant.

Why we like Nike?

Business model: If you think Nike is a sports company, well you are (partially) wrong. Nike is a design and marketing company. Nike does not produce its products, and its key competitive advantage is its ability to be a slim, cool and innovative company that partners with world famous athletes. Nike has maintained its leadership position due to its continued focus on design, research and development.

Innovation: Nike filed for 541 patents in 2014 and 687 patents in 2016. Nearly 80% relate to four key areas: footwear, apparel, data and manufacturing (source: BizJournals).

Nike continues to innovate and it has recently launched the Hyper Adapt, self-lacing shoes inspired by the movie Back to the Future. These shoes are currently priced at $720 and are a niche product, but they show that Nike is a market leader in this industry in terms of innovation.

Brand: undoubtedly Nike is one of the most recognizable brands in the world. According to Forbes, Nike is the 18^th most valuable brand in the world with a value of $27.5B. By comparison, Adidas is #90 and worth $7B. More importantly, compared to a year ago, Nike’s brand value has increased by 5%, while Adidas increased by 2%. Under Armour? Not in the top 100.

Interbrand assigns similar values but finds that, over 12 months, Nike a brand increased in value by 16%, while Adidas decreased by 8%. How about new generations and social media? Nike has, by far, the greatest number of Instagram followers vs. all brands (not only sports; source: Statista). Nike has 65 million Instagram followers, vs 15 million for Adidas. Read this article to appreciate Nike’s Instragram success.

Management and shareholder friendliness

It is well known that Nike’s management is top notch. Mark Parker, the CEO, has been with Nike since 1979, and has been CEO since 2006. Under his tenure as a CEO, in 10 years, Nike’s revenues and profits have tripled. He owns almost 2 million shares in Nike, a personal commitment of $100M.

Over the last decades, Nike’s shareholders have been rewarded by a stellar stock performance, buybacks and dividend increases. Nike’s dividend increased from $0.26 per to $0.72. It currently offers a 1.4% yield, not extraordinary but interesting considering its past double digit growth. Nike has also repurchased a large number of its own shares. In 10 years, its share count decreased by approximately 22% (source: GuruFocus).

Profitability

Nike’s business model ensures strong and consistent profitability. For its size, Nike is also very agile and its performance metrics are great: ROE of 30.2%, ROA of 12.4%, ROC of 26%. How does this compare with its competitors such as SKX, LULU or UAA (source: Simply Wall St and 4-traders)?

How about margins? Nike has an operating margin of 14% (growing), while Skechers boasts 10.6% (growing), Lululemon has 18% (declining), Under Armour 9% (declining), and Adidas 7.5% (growing). Hence, based on these metrics, the only company that is in a slightly better shape than Nike is Lululemon.

Valuation

However, LULU is valued considerably higher than NIKE:

• P/E 2017: Lulu 29, Nike 21.8
• EV/EBITDA 2017: Lulu 16, Nike 15.2
• EV/Sales 2017: Lulu 3.5, Nike 2.3

We value Nike at $65 per share. We expect a long-term growth above 5% and a WACC of 7%. At current prices, Nike is a BUY.

Conclusion

Nike is not cheap and is not on sale, but it is a great company at fair value. The company has an outstanding track record, top notch management that rewards shareholders, strong brand, balance sheet and profitability. Now it is discounting some temporary weakness in the U.S. and competition from the likes of Under Armour is gaining market share, but Nike is a great and innovative company that will thrive in the long term. We started a position today.

As always, thank you for reading. If you would like us to cover a company, please email us at [email protected] or visit our website for information about Integer Investments. Thank you for reading!

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