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Nike (NKE) is a world leader in athletic footwear, apparel and accessories. It operates in over 180 countries with expected FY 2009 revenues of $19.7 billion. Officers and directors control 95.5% of the class ‘A’ shares and 19.7% of the class ‘B’ shares (assuming full conversion of class ‘A’ into class ‘B’ on a one-to-one basis).

Nike seems well on its way to its eleventh straight year of increased EPS. Earnings per share from FY 2008 (ended May 31, 2008) came in at an all-time high of $3.44 and EPS for the first half of FY 2009 were $1.83 versus $1.63 for the period ended November 30th.

Consensus views are that NKE can hit $3.77 and $4.15 for the FYs ending in May 2009 and 2010 respectively. Thus Nike shares now trade at just 12.8x trailing earnings and <12.3x calendar year 2009 expected EPS of $3.90. Excepting last fall’s panic period, these shares have not traded at this low a valuation since 1995.

Here are Nike’s historical per share numbers as reported by Value Line. (FY 2009 data includes Zacks estimates for the second half).

FY …… Sales ….. C/F …... EPS ….. Div….. Avg. P/E

2002 … 18.59 ….. 1.78 ….. 1.23 ….. 0.24 ….. 21.2x

2003 … 20.29 ….. 1.90 ….. 1.39 ….. 0.27 ….. 17.1x

2004 … 23.29 ….. 2.37 ….. 1.76 ….. 0.37 ….. 18.4x

2005 … 26.16 ….. 2.64 ….. 2.25 ….. 0.48 ….. 17.9x

2006 … 28.87 ….. 3.20 ….. 2.63 ….. 0.59 ….. 16.0x

2007 … 32.41 ….. 3.43 ….. 2.86 ….. 0.71 ….. 16.4x

2008 … 37.93 ….. 4.15 ….. 3.44 ….. 0.88 ….. 17.8x

2009 … 41.40 ….. 4.50 ….. 3.77 ….. 1.00 ….. 15.5x

The consistent growth in sales, cash flow, earnings and dividends puts Nike in a select group. The dividend yield of 2.09% is substantially higher than any time in the past 20 years.

Nike’s balance sheet is in fine shape. As of November 30, 2008 it held over $2.72 billion in cash against total debt of $794 million. Value Line rates its financial strength at ‘A+’. Its percentile rankings for ‘stock price stability’, ‘price growth persistence’, and ‘earnings predictability’ were 90th, 85th and 95th respectively (with 100th being best). It garnered Value Line’s top safety rating as well. This is a high quality issue.

Even allowing for a lower than typical multiple of 14 (on calendar year expected EPS of $3.90), I see a 12-month target price of around $55 or 15% above last week’s quote. Add in the better than 2% yield and you can conservatively project at least a 17% total return over the next 11.5 months.

Is that target realistic? It’s probably way too low. These shares have a 10-year median P/E of 19x and didn’t have an average multiple under 16 from FY1996 right through FY 2008. NKE shares hit annual highs of $67.90 and $70.60 during 2007 and 2008 (when fundamentals were not as good as they are today).

Buying and holding Nike shares seems like a good bet for solid returns on a blue chip company during this shaky market environment.

I’m looking to do even better by using an option-augmented play on Nike.

Here’s how I’m playing this stock today:

…………………………………… Cash Outlay ……. Cash Inflow

Buy 100 shares @ $47.77 ….…….. $4,777

Sell 1 Jan. 2011 $55 call @ $7.40 …………………….….. $740

Sell 1 Jan. 2011 $55 put @ $15.40 …………………….. $1,540

Net Cash Out-of-Pocket …………. $2,497

On expiration date in Jan. 2011:

If Nike shares have risen to $55 or higher (up $7.23/share or + 15.2% from their current price):

  • Your $55 call will be exercised.
  • You will sell your shares for $5,500.
  • You will have collected $200 in dividends (at today’s rate).
  • Your $55 put will expire worthless (a good thing for you as a seller).
  • You will have no further option obligations.

You now hold $5,500 for the shares plus the $200 from dividends or $5,700 for your original cash outlay of $2,497.

That’s a 128% total cash-on-cash return if this ‘best case’ scenario plays out as described.

That can take place if NKE shares rise by just 15.2% or better over an almost two year period.

What’s the risk?

If Nike shares stay below $55 you could be forced to buy an additional 100 shares of NKE stock for $5,500 more cash. You would then own 200 shares of NKE total for a net cash outlay (from start to finish) of $7,997 = $39.99/share (excluding dividends).


Break-even on this trade is figured as follows:

On your original shares, it’s their $47.77 purchase price less the $7.40 /share call premium = $40.37 /share.

On the put you sold, it’s the $55 strike price less the $15.40 /share put premium = $39.60 /share.

Your overall break-even would be the average of those two prices or $39.99 /share.

Nike shares could decline by up to $7.78 /share or (-16.3%) before you would realize a loss on this trade.

Disclosure: Author is long Nike shares and short Nike options.

Source: Nike: 'Sneaking' Your Way to Great Returns