Buy Nike: Strong Fundamentals And Share Buybacks

| About: Nike Inc. (NKE)

In our earlier article on Nike (NYSE:NKE), we had recommended buying Nike based on its revenue growth, fundamental strength, share buybacks, and investment in the most profitable businesses. We reiterate our buy rating after the company beat both revenues as well as EPS consensus analyst estimates.

Nike beat analyst estimates for both EPS and revenues for Q1 FY2013. It posted EPS of $1.23 while analysts expected $1.12. Last year, Q1 EPS were $1.36. The revenues of $6.7 billion were also above analyst expectations of $6.42 billion. This is 10.2% more than sales of $6.08 billion in the same quarter last year. In the last quarter (Q4 FY2012), the company had missed the Street's estimates for revenues and EPS.

Revenues showed growth in all categories of business, and across all geographical areas, except Japan and its licensing business. North America and emerging markets continue to be the primary drivers of growth with 23% and 22% revenue growth respectively as compared to last year's quarter. The gross margin was lower by 0.8 percentage points because of higher input costs, the move to direct distribution in the Chinese market for Converse, and a shift to lower margin businesses. SG&A expense grew faster than revenues (18%) because the company spent more on marketing for its products, as well as on support for the Olympics and European Football Championships. The demand creation expense was 29% more than last year. The effective tax rate was 3.2 percentage points more because most of the earnings came from higher taxed areas, like the U.S. As announced earlier by the company, the Cole Haan and Umbro businesses are intended to be diversified because of their losses. Excluding these businesses, EPS would have been $1.27 (4 cents higher).

Future orders from September 2012 to January 2013 are expected to grow by 6%, including the exchange rate effect and 8% without the exchange rate effect. The currency effect on these orders is largest for Europe. North American orders continue their double digit (13%) growth. Like many other apparel and footwear companies, Nike faces pressure due to weak economic conditions, both in the U.S. and Europe.

The company's previous $5 billion share repurchase program has completed, and the company announced a new program on September 19. Under the new programs, NKE is authorized to purchase $8 billion of Class B common stock in four years. The current market cap is $43.7 billion, and there are 361 million Class B shares outstanding. This shows management's confidence in the growth potential for Nike, both for cash and earnings. The cash equivalent balance was $2.16 billion as of Q1 FY2013. The company has a dividend yield of 1.5%.

Analysts continue to estimate an 8% earnings growth rate for the next 5 years.

At NKE's 5-year average P/E of almost 18x, and $5.89 EPS estimates for 2014, the share price comes out to be $106. The 52-week high is $114.

While in the short run, Nike will face pressures due to economic conditions in Europe, and slow growth in China, we recommend buying NKE for its long-term potential because the company is continuing its focus on its more profitable businesses. It also has fundamental strength and wants to continue to return value to investors through its $8 billion repurchase plan and dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article