NKE - Get Report), to which Cramer replied: "I like Nike. I like Under Armour even better." Now, the second bit about Under Armour ( UA - Get Report) might very well be true, but I'd like to investigate the Nike comment a touch more. I'm guessing Cramer and I share a similar view on this subject, but I also believe that it's important to decipher the difference between a good company and a good investment. Just because someone says they like or don't like something doesn't mean that you can substitute that for proper due diligence. It's always good to double-check what you're hearing. Even within this article, there are many more items that you would probably want to investigate. The first thing that I would check when looking into Nike is the company's business results. F.A.S.T. Graphs. Here we see that Nike was able to grow earnings by about 13% a year (orange line). In addition, we can also see that dividends (pink line and blue shaded area) have begun to increase at a steady rate.
In turn, shareholdings were rewarded for holding a good company whose business performed well. Total shareholder returns compounded at an annual rate of almost 14%, trouncing the S&P 500 during the same period and basically mirroring Nike's business results. Further, it's really not much of a secret why NKE was able to provide such steady business results. If we take a look at the Fundamental Underlying Numbers (FUN) Graphs, we see that Nike has had steady gross profit margins along with net profit margins. People are consistently willing to pay a premium for having a swoosh embroidered on their apparel versus sporting a "non-check mark" alternative. Additionally, it should be noted that the consistency of margins is perhaps more relevant than their growth. Growing margins would be great, but once a company is churning out profits, sustainability is paramount.
In tandem, this translates to strong returns on investors' money. For example, return on equity has been stable as of late hovering around 20% and return on assets has been around the 14% mark.
Aside from consistent margins and shareholder returns, Nike has also demonstrated a propensity to sell more items and build up the value of the company. Specifically, sales per share and common equity per share have grown by a yearly average of about 9.7% and 10.8% respectively. Granted the latest recession created a small stutter-step, but for the most part NKE has done an excellent job of recovering. I suppose this isn't altogether surprising given that NKE does about 60% of its business outside of North America. Finally, I'd like to note that while the business results of Nike have been steady to strong, management has also been active in efficiently reducing common shares outstanding via the company's share repurchase programs. This effectively boosts shareholder returns and makes it easier for the underlying business to achieve earnings per share growth. So taking the metrics collectively -- strong operating results, increasing dividends, steady margins, reasonable returns on shareholder's money, consistent revenue growth and an effective repurchase plan -- it appears that Cramer is right on the money. In fact, after looking a bit deeper, I like the company quite a bit as well; it's easy to see why it consistently turns out profits.
To further envision the mismatch between a great company and a less-than-ideal valuation, the Estimated Earnings and Return Calculator provides five-year estimated total return results -- 4.8% -- that greatly trail the expected business results of the company. Twenty-three analysts reporting to S&P come to a consensus estimated growth rate of about 13%. Looking to Zack's to test this number, one would find a similar projection. So the business results don't appear to be a problem, but the valuation moving forward might be. As a consequence, shareholder returns could lag business results even over the long term.
Now it is important to realize that the Estimated Earnings and Return Calculator is just that -- a calculator. As such, the total return estimate is based on consensus earnings estimates and growth rates, combined with an ending P/E ratio that is commensurate with the companies expected business results. So, for example, if you believed that 19.5 was a more rational P/E number you could adjust the expected return upward. Although it should be noted that even then the performance returns would likely trail business results. In any event, it's important to stay humble in your assumptions.