Nike's Not Getting Tired

NEW YORK (TheStreet) -- Athletic footwear and apparel giant Nike (NKE) will report fiscal first-quarter results on Thursday and the Street is eager to see if the company can continue to "just do it."

There's no question shares of Nike, which are up close to 40% on the year, have been on a considerable run. But the "it" to which I refer has more to do with the company's ability to perform despite what have been brutal economic conditions in Nike's most important markets, including Europe and China.

Despite the tough environments, rivals Under Armour ( UA) and Adidas ( ADDYY) never could exploit an opening to catch Nike. The company's management was able to maintain its lead not only with continued innovating, but also a re-energized focus in product development. With revenue surging more than 7% in the June quarter combined with 1% year-over-year improvement in gross margin, it was clear to the Street that if China couldn't slow down Nike, there's no stopping this company.

Nike's reward has been a stock that has surged close to 60% since the company reached a pre-split low of $89.65 ($44.82 adjusted) per share 10 months ago (Nov. 14). After Nike's strong June quarter, during which fourth-quarter results beat on both the top and bottom lines, it's understandable why investors have gotten excited. However, I can't say that I see much value left in these shares at this level. It's not as if the competition is letting up.

Take, for instance, Adidas, which is ramping up its innovation and recently signed a partnership with BASF ( BASFY) to create Energy Boost. Adidas describes Boost as a revolutionary cushioning technology that provides the highest energy return in the running industry. Adidas claims Boost combines soft cushioning and responsiveness, two things that have been contradictory to athletes in the past.

Likewise, Lululemon ( LULU), which has begun to revolutionize the apparel industry for both women and men, shouldn't be understated either. Although the resignation of CEO Christine Day brought a chill to the company, Lululemon is growing three times faster than Nike while posting better same-store sales growth. I do understand Nike is much bigger and Lululemon still lacks the profits. Even so, Lululemon has created an entire market (yoga) for itself and has begun to encroach in areas like menswear and cycling.

Essentially, with Adidas in footwear and Lululemon in apparel, Nike is being attacked by two companies that are well positioned to compete not only in innovation but also in brand appeal. Now, I'm not discounting Nike's string of strong performances amid weakness in China and here in the U.S. I also appreciate there are now signs both economies are beginning to rebound.

Truth be told, though, Nike stock has been expensive for six months, as I discussed here. To that end, I don't believe economic improvements in the U.S. and China will change this fact. Before you disagree, consider that Nike is valued at more than 22 times its earnings for this fiscal year. Further, given that the company's price-to-earnings ratio is at 25, this means shares are trading at a valuation that is five points higher than the company's five-year P/E average of 20.

On Thursday, when Nike reports fiscal first-quarter results, the company will have another chance to run over the valuation argument. The Street will be looking for earnings of 78 cents per share on revenue of $6.97 billion, which would represent year-over-year revenue growth of 7.6%. Given that Nike reported an 8% increase in its "futures" orders in the June quarter, I have no doubt the company will beat its revenue target.

Futures -- as it sounds -- represent something like a "backlog" or a relied-upon commitment to buy. It's not an exact science for predicting Nike's sales, but it's a worthwhile gauge of product interest. In that regard, and as I've said, I really can't fault investors for having rewarded the stock with such strong gains.

My issue is strictly with the valuation. I'm not suggesting long-term holders can't still do well here. But Nike would have to fall below $60 for me to touch it with my own money.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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