Nike's Long-Term Goals Are Better Than Anything Kicked in the World Cup

NEW YORK (TheStreet) -- World Cup fever seems to be everywhere.

The recent gains in Nike (NKE) stock (up 6.5% since May) have been attributed to the popularity of soccer ... excuse me, futbol. This suggests that once the final goal is made investors should pack up their tents and kick Nike to the curb. This doesn't make sense.

The stock closed Tuesday at $78, flat on the year to date but down from the 2014 high of $80.09 reached in March. Investors are still missing the big picture.

>>How the World Cup Has Helped Twitter

Management has telegraphed exactly why the stock remains a strong buy. Nervermind that Nike is an overly safe long-term play, the company now expects to return to growth. Investors looking for an iconic brand that also pays a strong 1.3% yield better jump in now.

Nike has been and always will remain a strong global brand. Although competition has heightened from Adidas (ADDYY) and Under Armour (UA), Nike management has outlined long-term growth strategies to suggest it plans to maintain its market share and seize share from the competition by growing in key areas.

Never shying away from pressure, management projects to grow fiscal 2015 revenue to $30 billion. The company also expects to grow revenue at an annual rate of 10% over the next two years, culminating in revenue of $36 billion for 2017.

In the process, Nike expects to produce earnings per share in the mid-teens. There is nothing conservative about these targets, especially when considering that Nike produced a modest 5% increase in earnings in the most recent quarter.

How do you suppose the company will reach these goals? There are several options but in my opinion only two will matter -- and Nike has expertise in both.

First, very few companies, even those in the realm of technology, can match Nike's innovative qualities. The company has spent the past couple of years figuring out ways to widen its lead over its rivals.

Nike has invested resources, working with manufacturers to produce high-performance materials to come up with products like knitwear shoes and its popular FuelBand, which (according to some) inspired the much-rumored iWatch that is due out this fall by Apple (AAPL).

This level of innovation and outside-the-box thinking has re-ignited Nike's revenue growth in North America, which was up 10% in the most recent quarter. For that matter, even areas like China that were perpetually weak inched up 4% year over year. And I see no reason to expect a decline. Nor does the company's management, given their aggressive revenue growth targets.

The other thing in Nike's favor: Very few companies have been as aggressive as Nike with its share repurchase program over the past decade. During that span Nike has bought back roughly 15% of its stock. But it's just the beginning.

While Nike does have a strong operational focus, which helped it deliver a 170-basis point jump in gross margin, companies this size (roughly $70 billion market cap) aren't expected to post mid-teens in earnings per share. This tells me the company plans on taking more chunks out of the float with additional buybacks.

When you combine ongoing share reductions, 1.3% dividend yield and a committed management team unafraid of pressure (even from itself), you have a winning formula for shareholder value.

I've set it up. Now all you have to do is kick it in the net and profit.

At the time of publication, the author was long AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates NIKE INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate NIKE INC (NKE) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, reasonable valuation levels and solid stock price performance. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • NKE's revenue growth has slightly outpaced the industry average of 8.3%. Since the same quarter one year prior, revenues rose by 10.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • NKE's debt-to-equity ratio is very low at 0.13 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, NKE has a quick ratio of 1.71, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Textiles, Apparel & Luxury Goods industry and the overall market, NIKE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

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