ElCid16 (94.10)

Nike isn't a sell, let alone a "Strong Sell"

August 21, 2012 – Comments (1) | RELATED TICKERS: NKE

I hadn't been following NKE until I came across Eddy Elfenbein's latest article titled "Nike is a Strong Sell."

 http://www.crossingwallstreet.com/archives/2012/08/nike-is-a-strong-sell.html

After about 30 seconds of reading, I immediately decided I disagreed with him, and after a few more minutes of research, I'm starting to think it's actually a decent buy at these prices.

Per the last earnings report, quarterly revenue was up 12% (Elfenbein states in his blog that revenue "plunged" 12% - not sure how he missed that one).  Net income dipped from $590MM to $550MM, but $24MM of that was a write down.  The non GAAP EPS miss wasn't as bad as the $0.20 miss that Wall Street blew out of proportion.

The slight slip in margins doesn't worry me too much - its not uncommon for a company to sacrifice short term profits to grab market share in new markets, which Nike is frantically trying to do in SE Asia.  Coke is notorious for doing this.

3 year revenue growth is clocks in at 8%; 5 year growth at 6%.  Assuming revenues correlate with earnings over the long term, I think growth at these levels easily warrants a PE of 20+.  If you back out the $3B in cash on NKE's balance sheet, the current PE is well under 20.  If the company grows at 5% for the next 10 years, the company is arguably fairly valued.  If growth exceeds 5%, it's undervalued at these prices.

The technicals look a little weak - the stock recently fell through the 50 day, 200 day, and 50 week SMAs.  If the stock continues to fall, I might add a position.

I typically love reading Crossing Wall St, but I think he's a bit off base saying he's not a buyer until it hits $70 - I don't think it will ever get there...