I wrote about the importance of economic moats in my '10 things to look for in a stock' ebook. There are very few companies that have a greater economic moat than Nike (NKE). I have searched far and wide for a company that could pose a serious threat to Nike over the next few years. I have not found one yet.
Morningstar bases Nike’s economic moat on its “superior product development capabilities, globally recognized brands, tremendous economies of scale, and a solid foundation in several emerging markets”. I think that the Nike name and swoosh are easily worth billions of dollars in goodwill to the company.
Nike And Its Competition
Nike is still the world’s largest creator of athletic footwear and apparel. Nike sells to more than 50,000 retail accounts, through a network of almost 700 company-owned stores, and through independent distributors and licensees in more than 170 countries. Nike owns the Cole Haan, Converse, Umbro, and Hurley brands.
Nike’s Biggest Threats
Adidas AG (OTCPK:ADDDF) is the largest competitor to Nike in the athletic apparel and footwear market. The company owns the ADIDAS, Reebok, Reebok Hockey, CCM Hockey, Rockport, TaylorMade, adidas Golf, and Ashworth brands. Adidas AG has similar revenue numbers and more employees but the company’s products do have the cache of a Nike domestically.
Under Armour (UA) is a long-term threat to Nike. The company has been trying to gain market share in the footwear market and has made its apparel brand recognizable throughout the United States. The stock has great growth potential and is a solid long-term play but the company is at least a decade away from being any sort of threat to the Swoosh.
Nike’s Financial Dominance
Financial statements are a critical component of stock investing. Nike’s dominance can be seen in its financials. Nike had a nine year streak of revenue growth from 2001 to 2009. The company fell $163 million dollars of a decade long steak of revenue growth last year. Nike’s net income is larger than its 7 largest competitors combined.The company has nearly $5 billion dollars in cash and just $600 million dollars in debt.
Gross margins are high at over 46%. The company only had one year last decade in which gross margins dipped below 46%. Earnings per share has grown 400% since 2001. Book value has tripled over the past decade and free cash flow has increased seven fold since 2001. Dividend payment are nearly 500% higher than they were in 2001.
Nike just keeps on producing. The company has a proven track record of success and rewards it shareholders with increasing dividend payouts and a stock that keeps appreciating. Shares of Nike rose 206% from 2001 to 2010. I am a long time Nike shareholder and have been fully satisfied.
I wouldn’t run out and buy shares today as they look fully valued at $85 per share. But I would look to add to my position in the $70′s. Nike still remains a premium franchise and the king of the athletic footwear market.
|Stock||Individual Average |
|Rev Growth (3 Yr Avg)||5.2||1.5|
|EPS Growth (3 Yr Avg)||9.6||-1.2|
|Operating Margin % TTM||13.5||8.8|
|Net Margin % TTM||10.3||3.5|
Disclosure: Long Nike