NIKE, Inc. (NKE), K Swiss Inc (KSWS): Is This Shoemaker Selling Shareholders Short?

Comps
Given that the company is bleeding money, and with no guidance to suggest a return to profitability in coming quarters or years, it’s hard to use some traditional valuation metrics, but let’s get a little creative.

Let’s look at — assuming different or reformed management that could allow K-Swiss’ SG&A costs to get in line with competitors’ — potential bottom-line numbers. In its most recent reported quarter, NIKE, Inc. (NYSE:NKE) had SG&A costs that were 31% of total revenue. At that level, K-Swiss would generate a profit before interest, tax, and depreciation of 3.6% of revenues, or $8,022,636. If you take cash and short-terms out of the market value of the company, the operating business is valued at just $29 million — less than four times the above earnings number. NIKE, Inc. (NYSE:NKE) currently trades at an EV/EBITDA of 13.53.

The company sells its shoes at a higher price internationally and has the ability to turn around its decreasing sales numbers with more effective marketing. Even a modest increase in sales coupled with a dramatic decrease in SG&A costs would imply that E.Land is, in fact, getting a heck of a bargain deal for K-Swiss.

Of course, NIKE, Inc. (NYSE:NKE) is a well-run company with many lines beyond footwear and basic apparel. It has an unparalleled brand around the world and is widely considered the No. 1 name in sports apparel. K-Swiss is more of a niche player and may not ever justify the multiples that Nike does, but even a modest correction would put the value of the company far above the $4.75 offer price.

One Fool’s opinion
I believe shareholders may not be getting a great deal with this acquisition, which was unanimously approved by the board. K-Swiss needs a Superman/activist to swoop in, accumulate a 10%-plus stake, throw out management, appoint new directors, and maybe shop the company to a better buyer or just improve it internally. Will any of that happen? Well, there are activists involved currently, but right now the battle is to prevent the sale to E.Land at $4.75. Investors may want to wait until a clearer catalyst is identified before they buy this deep value play.

The article Is This Shoemaker Selling Shareholders Short? originally appeared on Fool.com and is written by Michael B. Lewis.

Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Nike.

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