The Bull Case for Nike (NKE)

| About: Nike Inc. (NKE)

NIKE, Inc. and its subsidiaries engage in the design, development, and marketing of footwear, apparel, equipment, and accessory products worldwide. It designs athletic footwear for running, cross training, basketball, soccer, sport inspired urban shoes, and children’s shoes. (Y! Finance)

Before reviewing the catalysts that make it a buy, let's note why its share price was recently knocked down, despite reporting strong sales figures [see NKE Nike Corporation F3Q06 Conference Call Transcript]:

1) Due to unfavorable currency changes, as Nike operates in various countries, from BRIC to U.S. & Europe.

2) Higher tax-rate

3) Squeeze on gross margins in Europe

Now, catalysts that rank NKE a buy:

1) NKE reported worldwide futures orders for athletic footwear and apparel, scheduled for delivery from March 2006 through July 2006, totaling US$5.4 billion, 2.9 percent higher than such orders reported for the same period last year. Changes in currency exchange rates reduced this growth, as global futures orders grew by 5.4 percent excluding the impact of currency changes.

2) Businesses in the USA, the emerging markets of Russia, China and Latin America, and non-Nike branded businesses continue to grow very strongly. This is evident in 3rd quarter results: U.S. revenues increased 14 percent, Asia Pacific region grew 13 percent, Americas region increased 41 percent & other business revenues grew 17 percent. Revenues in U.S., BRIC & Asia Pacific largely offset the European region, which declined five percent.

3) Argentina and Brazil were the largest contributors for the revenue increase, every country in the region grew for the quarter, and all but one grew double digits. Gross margin for the third quarter increased 160 basis points versus the prior year, and pre-tax profit for the region increased 69% to $39 million.

4) NKE's SG&A (Selling, General & Admin expenses) dropped more than 1.2%, which shows management efficiency & also NKE purchased approximately US$128 million in conjunction with the Company's four-year, US$1.5 billion share repurchase program.

5) The shares should command a premium to peers, based on NKE's proven ability to market technologically advanced athletic shoes at premium prices, and its market leader status.

6) Nike's valuation is at a five-year low, at nearly 15 times 2006 earnings, and shares trade at a discount to those of Adidas-Salomon and Puma AG, which trade at approximately 16 times and 20 times earnings, respectively.

When to get in: I would add a little position at current prices, but I still believe the stock goes a bit lower before it reaches its target of 100. I think I'm being conservative -- analysts expect NKE to earn $5.40 for 2006 & with Fwd P/E of 19, you get 105.

NKE 1-yr chart:

Disclosure: I do not own the stock

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Tagged: , Textile - Apparel Footwear & Accessories
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