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Is NIKE, Inc. (NKE) a Good Stock to Buy?

The third quarter of NIKE, Inc. (NYSE:NKE)’s fiscal year ended in February, with the company reporting strong numbers for that quarter earlier this month. Revenue grew 9% compared to the same period in the previous fiscal year, in line with the company’ results in the previous six months. Nike had been seeing flat margins, however, and was able to widen those considerably last quarter with the result being a much larger percentage increase in net income and 9% growth on the bottom line for the first nine months of the fiscal year. Cash flow from operations year to date has also been much higher; Nike did use more than 100% of CFO to buy back shares and pay dividends, with the balance of cash coming from investing activities.

SAC CAPITAL ADVISORS

The market is currently expecting NIKE, Inc. (NYSE:NKE) to continue to grow its earnings at a nice rate going forward, with the stock trading at 23 times trailing earnings. Analyst expectations are for $3.06 in earnings per share for the fiscal year ending in May 2014; that would represent a 15% growth rate in EPS over the estimated numbers for the current year, and a forward earnings multiple of 20. While the company is a market leader with a strong brand name, that pricing seems a bit high- Nike would likely have to hit sell-side targets for the current fiscal year and the forward one, and then sustain double-digit growth rates in EPS for several years, in order to justify the current valuation. So even with the significant growth opportunities in the developing world, we don’t think that Nike is a good buy right now.

Lansdowne Capital Management, managed by Sir Paul Ruddock and Steve Heinz, was the largest holder of NIKE, Inc. (NYSE:NKE) stock at the end of December out of the hedge funds and other notable investors which we track in our database of 13F filings (find Lansdowne’s favorite stocks). Billionaire Steve Cohen’s SAC Capital Advisors was a heavy buyer of Nike during Q4, closing 2012 with 2.6 million shares in its portfolio (see Cohen’s stock picks). Citadel Investment Group increased the size of its own position by 56% to a total of 2.1 million shares; that fund is managed by billionaire Ken Griffin. Check out more stocks Griffin was buying.

Other footwear companies include Wolverine World Wide, Inc. (NYSE:WWW), Deckers Outdoor Corp (NASDAQ:DECK), Crocs, Inc. (NASDAQ:CROX), and Skechers USA Inc (NYSE:SKX). Crocs and Deckers are the cheapest of this peer group in terms of trailing earnings multiples; Crocs, Inc. (NASDAQ:CROX) actually trades at only 11 times trailing earnings. Revenue has been growing, and analyst expectations are for earnings to improve over the next couple years such that the forward P/E is only 9. That’s a considerable discount to NIKE, Inc. (NYSE:NKE), and so the stock looks worthy of further research. Deckers Outdoor Corp (NASDAQ:DECK) saw its net income fall 21% in the fourth quarter of 2012 versus a year earlier, though its trailing earnings multiple of 16 would normally assume improvements in net income; the stock is a very popular short, with over 40% of the float held by short sellers. That looks crowded, so we’d avoid either side of the Deckers trade.

Wolverine World Wide, Inc. (NYSE:WWW) and Skechers USA Inc (NYSE:SKX) carry forward P/Es in the 14-15 range, though in these cases the companies are highly dependent on earnings improving from what they have done in the last few quarters. Wolverine- thanks, at least in part, to a recent acquisition- had sales figures rise 60% in its most recent quarterly report compared to the fourth quarter of 2011. There’s a significant short community at that stock as well, but it’s quite plausible that it will achieve its growth targets and so it is likely worth waiting for another quarter or two of results there. Skechers also reported very good revenue numbers, and so while the company has been struggling with profitability (it was actually expected to report negative profits for Q4 2012 but instead experienced a gain) it looks like another stock which investors may be able to make a firmer judgment on after more results.

Disclosure: I own no shares of any stocks mentioned in this article.

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