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Streetwise for Sunday, July 5, 2020









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Streetwise for Sunday, July 5, 2020

While I am the antithesis of your normal sports enthusiast, that is not a hindrance to recognizing successful companies in the athletic arena. Consider for example, Nike (NKE). 

Nike would be my first suggestion for a research candidate in the competitive world of sports apparel. (Yes, I am aware of the controversies that have surrounded Nike in the past.) Keep in mind that Nike has returned over 25% per year to shareholders during the past 35 years.

Dividend growth is an indication of a great business as rising dividends are often synonymous with increased earnings, thereby confirming the quality of the business model. It is also an indication that a company has sufficient free cash flow with which to reward shareholders.

When I wrote about Nike a year ago, my earnings estimate for fiscal 2020, (Nike’s fiscal year ends on May 31) was $2.90 per share with a 12-month projected share price of $92.

So how did the company do? Earnings for fiscal 2020 came in at $2.37 as Nike saw a decline in its fiscal-year results. The shares recently traded at 97.70.

Strong third-quarter results and hope for greater digital sales did not materialize into the fourth quarter. However, sales have seen a bit of recovery recently. Nonetheless, after reporting fourth quarter results Nikeís share price fell more than 7%.

The fourth-quarter results were on the soft side with sales down 38% to $6.3 billion, due no small part to the COVID-19 outbreak.

Gross margins were down more than 8% to 37% due to significant operating deleveraging and an inability to substantially reduce costs short-term. Operating profit in the fourth quarter was $1.2 billion, resulting in a net loss for the quarter of $804 million.

For the 2020 fiscal year, revenue fell 4% to $37.4 billion, down 2% due to the impact of COVID-19 on business operations, primarily in the fourth quarter. 

In the first half of fiscal 2020, prior to COVID-19, revenue was up 11%, reflecting strong, broad-based consumer demand, higher full-price sales realization, and a double-digit increase in digital sales.

Fiscal 2020 saw digital sales increase 49 percent, with geographic sales areas turning in strong double-digit growth. Net income was $2.5 billion with earnings of $1.60 per share, down 36% due to lower revenue and a gross margin impacted by COVID-19. 

Higher selling and administrative expenses were partially offset by a lower tax rate and a lower average share count. Included was a one-time, non-cash charge associated with the strategic distributor partnership transition in South America, which reduced earnings per share
by $0.25.

Nonetheless, with $8.8 billion in cash, cash equivalents and investments, the company’s net debt load is just shy of a billion dollars.

Wall street has been upbeat on Nike because of its dominant market position and long-term demand growth forecasts. Innovative products along with a proactive position on social issues and important sport partnerships, have all benefited the company’s valuation.

The result has been sales that doubled over the past decade and a pristine balance sheet. The Street’s only complaint might be that operating margins have been flattish in the low double digits.

The company has changed how it recognizes revenue in 2018. Revenues are now recognized on shipment and not on delivery. Given the increased in e-commerce, recognizing revenues on shipment is probably a good move.

Trading around 30 times earnings, the company’s shares include the perception of quality, and continued growth performance. To its credit, Nike has chalked up a significant valuation rise over the past decade. The shares were just a $10 stock during the economic depression in 2009 and traded at $50 as recently as the fall of 2017.

The intrinsic value of the company using a free cash flow to the firm is $110 per share. My earnings estimate for the 2021 fiscal year is $2.30 per share with a 12-month projected share price of $110, for about a 13.4% capital gain. There is also an indicated dividend yield of 1.00%. Nike has raised its dividend for 17 consecutive years.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

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