Nike Stock Investment: The Short Term And The Long Term

Stop reading this article and go visit this recent Business Insider piece “Nike Stock Could Do Something Unexpected Before The Olympics.” There is a chart at the bottom I want you to take a look at.

The writer, Seth Archer, succeeds in making a counterintuitive point: Large sporting events sponsored by Nike do not historically have the immediate effect of raising Nike’s stock price in the short term. The Nike stock price slumped in relation to: The 2008 Summer Olympics, 2010 Men’s World Cup, 2012 Summer Olympics, and 2014 Winter Olympics. Archer’s theory is that analysts and investors are gobsmacked by the revelation of just how much money Nike spends marketing these events and pull back from the stock.

But while Archer’s point is a nice piece of parlor information to store in the back of your mind, it is not something that should translate into investment advice or alter an attitude of extreme passivity towards a Nike investment. Look at that stock price in 2008 of $13/$14 per share. The stock is now at $54 in just eight years! Since June 2008, Nike has a compounding rate of 17.04% if you include the dividends paid out but don’t assume reinvestment. All of those slumps and gyrations did in fact happen over the past eight years, but the payoff has been that each $1 invested in Nike back in 2008 now has a value of $3.50.

Most of the companies I cover on this site are defensive stocks not just because they perform well during recessions, but also because they are warding off attackers and trying to maintain their moats. Many of them have ten year earnings growth rates in the single digits.

Nike stock is an exception. It is one of the few companies I cover that offers both the defensive attributes of high earnings quality while also the offensive attribute of high earnings per share growth.

When companies have blemish-free long-term records, some investors pause and ask: “Did the boat already pass? Did I miss it?” Just as I wrote that the next Coca-Cola is probably going to be Coca-Cola, the next Nike is Nike (even if the execution at Under Armour conforms to perfection, it will at best be the PepsiCo to Nike’s Coca-Cola or the John Mellencamp to Nike’s Bruce Springsteen).

The managerial competence at Nike hasn’t relied on financial engineering but rather the wealth created for Nike shareholders is the result of good old-fashioned growth. Someone back in 2000 was probably looking at Nike’s 19% annual returns from its 1980 IPO through the then-present 2000 and concluded that the epic growth at Nike had long past and the stock wasn’t worth holding for the long haul. And then Nike went on to compound at a rate of 17% from 2000 through the present day, which is impressive considering that the P/E ratio at Nike back then was well into the 20s.

Nike’s organic profits have tripled in the past ten years and earnings have quadrupled because the business also lowered its share count from 2.0 billion to under 1.7 billion because the low dividend payout ratio did facilitate some buybacks. Most interestingly, the earnings at Nike have kept going up, up, up.

I just took a look at the past twenty years individually, and there was no year in which Nike failed to report year-over-year earnings growth. In fifteen of those years, the earnings growth was in the double-digit range. I am sincere in appreciating Archer’s article about the short-term volatility of Nike stock relating to major sporting events, but from an earnings growth perspective, there has not been a more reliable business to hitch your family’s financial wagon to than Nike.

I thought it was unfortunate last year when Nike hit $68 in relation to $1.85 in earnings because that was a price that made you wonder whether the P/E compression would be a bit too much. The stated P/E ratio at the time was 36x earnings, and sure some of that is the result of currency translations, but it was at a place where you couldn’t really figure out whether the five year total returns would be satisfactory for a new investor.

Now, Nike trades at the much more reasonable price of $54 per share and the earnings are expected to hit around $2.20 per share this year. We’re down to 24x earnings on a constant currency basis, and about 22.5x earnings if you measure Nike’s earnings base in constant dollars. That’s much easier to figure out–even if the P/E ratio comes down to 20x earnings over the long haul, your total returns will be more than adequate provided the earnings growth remains in the 13% to 17% range.

Nike tells you that Chinese demand increased 36% year-over-year, the Nike outlet stores are averaging growth north of 20%, and the futures orders for merchandise are in the 17% to 18% range. This is not a business that is past its prime. It’s not the retired boxer hanging around the gym telling the kids he used to be the champ. It is still the champ, and the earnings reflect that. Frankly, I’m surprised that Nike doesn’t get more preeminent coverage on investing blogs. I suspect it has something to do with the low 1% initial dividend yield. But sometimes, you have to know when it’s in your best interest to overlook the general rules you create for yourself.