Is Nike A Solid Investment?

By John Del Vecchio  |  July 17, 2019

Nike (NYSE: NKE) has been in the news a lot recently.

The controversy surrounding its endorsement deal with Colin Kaepernick has certainly generated a ton of free advertising. While many armchair commentators in comments sections of news and opinion pieces covering the story claim they’re boycotting its products, NKE is within a hair of another new 52-week high.

Nike got a big boost when it pulled its Betsy Ross flag-themed shoe after Kaepernick essentially called it a racist symbol. I speculated that Nike did this on purpose to generate some buzz. Well, look at the results… that ton of free publicity has been accompanied by a several-billion-dollar increase in the company’s market cap.

Brilliant move.

But is NKE a buy here? What’s the risk profile look like?

The Rundown on Nike

Overall, NKE rates a solid “B” in my proprietary Forensic Accounting Stock Tracker (FAST) software. FAST analyzes dozens of variables and compares them to every other stock in a group or index.

On average, B-rated stocks can expect to outperform the market by a handful of percentage points per year. Let’s look at the scores across the specific factors and identify potential trouble spots for NKE.

Revenue Recognition: C.

Receivables tripped a red flag, which could indicate management stretched sales in the recent quarter. Nike’s international growth has been a key growth driver, and overseas customers typically require extended payment terms.

Cash Flow Quality: A.

Cash flow quality is solid, and cash flow return on invested capital is both strong and growing.

Earnings Quality: A.

Nike’s overall earnings quality is solid. It’s also improved over the trailing 12 months, which confirms the increase in stock price.

Expectations: B.

Nike is well covered on Wall Street, with little edge to be gained from trying to predict major revisions in estimates. There are 13 “strong buy” recommendations and two plain-old “buy” calls with five “holds” and just one “sell” among analysts who cover it.

Valuation: D.

NKE’s valuation is rich, especially relative to earnings and revenue. This is not a red flag but rather an indication that upside is limited without a new fundamental driver.

Shareholder Yield: B.

Nike is buying back stock and increasing its dividend. Free cash flow supports more shareholder yield.

Nike’s stock has mostly gone straight up. The FAST letter-grades support the move. However, there are two risks that give me concern.

First, the valuation is extremely rich. The current fundamentals are priced in. It’ll take something extra, a nice surprise, to push the stock higher.

Meanwhile, Nike just fell short of earnings expectations, which hasn’t hurt the stock… yet.

The bigger-picture risk is that Nike’s North American business growth is slowing. The segment grew 7% over the most recent 12-month period. China grew 24%. Europe grew 11%. And the rest of Asia and Latin America grew 13%.

I’m not sure people in China care much about whether the Betsy Ross flag is racist. As an American football player, Colin Kaepernick doesn’t carry much weight in the rest of the world. These controversies get the company name in the news. But it hasn’t provided a growth spurt in its largest segment. It’s only driven the stock to new highs.

Eventually, we’ll need to see some main-market growth to justify NKE’s move.

Otherwise, shareholders may be in the same boat as the people who paid $3,000 for a $120 pair of Betsy Ross sneakers, only to find their investment returns lacking.

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John Del Vecchio

John Del Vecchio is the author of the bestselling book, Rule of 72: Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio.

As the in-house stock market guru and forensic accountant for Dent Research, John stood on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, and built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around.

John is also the executive editor of our Hidden Fortunes newsletter and our trading service Small Cap All-Stars.

He graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.MORE FROM AUTHOR