Buffett Rumor Boosts Nike Shares
Warren Buffett
created waves again Tuesday as rumors circulated that his
Berkshire Hathaway
investment fund was building a position in beleaguered
Nike
(NKE) - Get Report
. The current crop of rumors, like those that lifted Nike's stock in May 1997 before shares crashed on profit warnings, are still unsubstantiated.
Nevertheless, eager investors, hopeful of riding the Great One's coattails, pushed Nike's stock up 8.5% to 44 3/8. And options activity raced throughout the day. The Buffett-Nike rumor didn't gain credence in the options market until late morning as volume on February and March out-of-the-money calls started perking up.
"The crowd found out about it much later than everybody else," said one
Pacific Exchange
trader in the Nike pit. Volume on the March 45 calls hit 2,500 by the close, and closed at 2 ($200), up 1 3/8 ($137.50) on the day. The February 45 calls, which have three trading days of life remaining, closed up 7/16 ($43.75) at 11/16 ($68.75).
Put sellers also showed up to dish the February 45s to the pit crowd, with more than 2,000 contracts changing hands.
"All the trading involved very bullish options plays," a trader said, adding that the crowd was expecting earnings by the third week of March. One strategy that may be tying the stock's move to a pre-earnings event was a bid of 1 7/8 ($187.50) on the February 45 straddle, a strategy in which an options player buys both the call and the put at the same strike price hoping for a violent move in the stock due to a major event. Nike would have to fall to around 43 or rise to about 47 to make the trade profitable.
In Chicago, traders said Nike had the look of a Buffett target.
"It's just like
Salomon Brothers
, now
Salomon Smith Barney
, a unit of
Travelers Group
(TRV) - Get Report
TRV and
Gillette
(G) - Get Report
G -- a depressed brand name," said Paul Foster, the options strategist at
1010WallStreet.com
.
Berkshire Hathaway already owns 4 million Nike shares through a portfolio it inherited when in 1996 it bought the remaining 50% of insurance firm
Geico
that it didn't already own.
While Nike mirrors the image of a beaten-down brand name that has attracted Buffett in the past, differences abound. Making Nike a quintessential Buffett value play are its global brand franchise, world-class distribution network, sophisticated product development infrastructure and savvy marketing expertise.
"Nike's worldwide market share exceeds the next three largest players combined --
Reebok
(RBK)
RBK,
Adidas
and
Fila
(FLH)
FLH," says Andrew Sidoti, an analyst with
William Smith
in Denver.
But the differences are perhaps more notable. While Buffett brands like Gillette have been masterful at increasing profitability amid moderate sales growth, Nike's return-on-equity has remained flat over the past three years as sales have tripled to $9.2 billion, Sidoti says. Nike's search for a new chief financial officer, which the company has said it expects to complete in the next six months, should address those concerns.
Nike declined to comment on the Buffett rumors.
Furthermore, whereas there are few substitutes for
Coca-Cola
(KO) - Get Report
, another Buffet holding, Nike has a pack of competitors. Never mind sneaker companies like Adidas, which are snapping at Nike's heels. The Beaverton, Ore., behemoth also must contend with makers of rugged outdoor shoes, like
Timberland
(TBL)
, which have been gaining ground during this so-called brown shoe craze.
Because of the more faddish nature of Nike's business, Sidoti argues, it should trade at a lower multiple than Coke or Gillette.
With Nike trading at 16 times 12-month trailing earnings, it's cheaper on a P/E basis than Coke was when Buffett first bought shares in September 1994, according to
Securities and Exchange Commission
filings. At that time the soft-drink maker was trading at 28 times 12-month trailing earnings.
But Nike's earnings deceleration makes the company's true value uncertain.
First Call
analysts expect the company to earn 39 cents per share in the third quarter, ending this month, compared with 80 cents per share last year. And some company watchers say the current estimates are still too high.
"It's not Buffett's style to buy a company that's still in fundamental decline," says Seth Tobias, with
Circle T Partners
, a hedge fund in New York that is short Nike. "People need to trade on fundamentals and not hopes and whims. Nike's a great franchise name. But you don't take the stock up 10% because you think Buffett's buying. You've got at least a year and a half of negative news with this company."
Salomon Smith Barney
analyst Faye Landes, the Wall Street pro who correctly espied Nike's growing problems last year, concedes that Nike's fundamentals have yet to improve. "They're still facing the same problems," she says. "In the U.S. there's a sea of inventory. Overseas, there are sharp downturns." She rates Nike a neutral and her firm hasn't performed underwriting for the company.
Others point to the looming loss of Nike's most notable spokesman,
Chicago Bulls
superstar
Michael Jordan
, who is expected to retire this year. They say other NBA stars, like Jordan's teammate
Dennis Rodman
, who is the spokesman for competitor
Converse
(CVE) - Get Report
, are less marketable. However, golf champion
Tiger Woods
is proving to be an extraordinary Nike ambassador.
Some industry watchers are predicting brighter times ahead for the company. John Horan, publisher of the
Sporting Goods Intelligence
, an industry newsletter, who attended the recent Super Show, a trade conference in Atlanta, was enthusiastic about Nike's new line of products. "The Alpha line for 1999 is terrific," he says. "It got a great reception" at the show, he says.
Whether or not Buffett is buying, most of Nike's institutional investors -- who are now solid value players as opposed to the momentum crowd that flocked to the stock before it crashed -- are sticking with the company for the long haul.
"It's good to have Buffett on your side, and you don't want to bet against him," says Ted Bridges, principal of
Bridges Investment Counsel
, which is based, along with Berkshire Hathaway, in Omaha, Neb. He last bought Nike shares when they traded at 39 in December and now owns 200,000 shares. "Once the information comes out" through public filings, "there's a halo effect," he says.
Since Buffet has renewed his confidentiality agreement on Nike, meaning he does not have to disclose his position in quarterly filings, it's likely the rumor mill will continue churning.
Staff Reporters Dan Colarusso and Eric Moskowitz contributed to this story.