On, February 4, 2012, Jeremy Lin, unknown, debuted as a starter for the New York Knicks. At the end of regulation, Lin came through with 25 points, 5 rebounds, and 7 assists in leading his team to victory against the New Jersey Nets. After one week, as the Knicks starting point guard, Lin had slapped together 27 / 5 / 8 in points, rebounds, and assists per game averages. Linsanity ensued amid a seven-game win streak in then basketball-starved New York City. Amid the Renaissance, details of Lin's vagabond life story emerged to capture the mystique of the Horatio Alger American Dream.
Today's American Dream, of course, is heavily weighted towards crossover marketability, international profits, and the China growth story. In the name of capitalism, Jeremy Lin, and Nike (NKE) were made for each other. Jeremy Lin will unite his stellar play and 'aw-shucks' charisma alongside Nike's otherworldly design team and marketing machine in Holy Matrimony. To fully appreciate the Jeremy Lin effect, we must first break down his no-look assists to Madison Square Garden (MSG) stock, before next comparing him to Yao Ming and Kobe Bryant, two other Nike pitchmen who have made lucrative inroads into China.
Jeremy Lin and Madison Square Garden Stock
In February 2012, amid the height of Linsanity, Madison Square Garden shares quickly gapped up from $29 to $33. This run continued until the month of May, when an injured Lin watched his Knicks get dominated and ousted in the NBA Playoffs by Miami Heat. At that point, the MSG advance stalled out at $38 per share. Because of Jeremy Lin's play on the court, Knicks Basketball was the hottest ticket in town. The hysteria translated into increased ticket and merchandise sales, which eventually trickled down into Madison Square Garden's bottom line and improved shareholder returns.
In its latest quarterly report, Madison Square Garden reported $31 million in Q1 2012 net income, which is a 63-percent increase over the 2011 year-over-year quarter. For MSG, Q1 ends on March 31, which would include the beginnings of Lin's meteoric rise. Broken down further, MSG reported $25 million worth of Q1 2012 operating income from its Sports Division, compared to $129,000 in the year-over-year period.
Jeremy Lin made $762,195 in 2011 base salary from the Knicks. For MSG shareholders, it was money well spent. At the moment, Lin now stands on the cusp of NBA contract negotiations, as a restricted free agent. I am certain that Knicks brass will pay top-dollar to retain this star for the New York market. Nike executives, of course, watched Lin's ascendancy with baited breath, as multiple sources report that the burgeoning star has already been signed to a multimillion-dollar shoe and endorsement deal.
China and NBA Basketball
With a population of more than 1.3 billion people, alongside its rapid industrialization, China is the world's most viable frontier for finished, consumer goods and services. Alternatively, China is increasingly receptive to Western capital, as means to legitimizing both its market reforms and authoritarian regime. Both the NBA and Nike eye the Chinese market lustily, as a long-term driver for net income growth. For all parties to meet their respective ends, it is critical that a transcendental superstar emerges to facilitate the role of Ambassador. With a Nike contract and starting role in tow, it is likely that Lin, Chinese-American, will assume the International Ambassador baton from Yao Ming, Kobe Bryant, and LeBron James.
Yao Ming and Kobe Bryant, especially, are wildly popular in China. Ming, from Shanghai, starred as the number one overall 2002 pick of the Houston Rockets, before his 2011 retirement. According to the Wall Street Journal, Kobe Bryant is a leading man in China, due to his five championship rings and multiple tours of the country. Kobe Bryant, in fact, has overtaken Yao Ming as Nike's top merchandiser, in terms of jersey and shoe sales in China.
Bryant, 33, cannot carry out his rejuvenation act against Father Time forever. At 23, serendipity would have it that yet again, Jeremy Lin is perfectly positioned to take advantage of another window of opportunity.
The Bottom Line
According to Sports One Source, Nike controls roughly 90 percent of the basketball shoe market, as it is the corporation most associated with Michael Jordan and all-around cool. Behind such dominance, Nike has performed as a story stock since the early 80s. In 2009, shares bottomed out at $40, before advancing towards $110 as of May 2012. With such impressive brand recognition, Nike's lease on Jeremy Lin's star appeal and liaison into China is effectively a cheap call option baked into the stock.
For fiscal 2011 ending May 31 last year, Nike posted $2.1 billion in net income, on 20-percent average annual growth over the past two years. In its latest quarterly report for period ending February 29, 2012, Nike is still operating at 10-15 percent year-over-year earnings per share growth. Broken down geographically, China represents Nike's largest growth engine. By all measures, Nike's profits attributable to China are improving by at least 25 percent each year.
In 2011, Nike earned $777 million in earnings before interest and taxes (EBIT) from China, out of a total $2,848 in EBIT. With Jeremy Lin and his shoes leading the way, I expect China to generate at least $1 billion in EBIT for fiscal 2013 and surpass North America as Nike's largest regional division by 2020. With a 25-percent foreign tax rate, Chinese sales would add at least $750 million to Nike's bottom line. By these estimates, Nike may post $2.5 billion in 2013 net income, or $5.25 in basic earnings per share. At 20 times forward earnings, Nike would have fair value at $110 per share.
Nike is a solid, long-term holding.