NIKE Has Good Sustainable Value Leaving No “Footprints”

Building on the sustainability and “green” discussions we talked about yesterday, we find it interesting to look into other industries and sectors that are also hopping on the environmental bandwagon. No that some of these firms weren’t pushing this way in earnest before the election outcome, but we can’t blame them for making more noise about these initiatives going forward. We are big fans of sustainable business models (both environmentally and from a cash generation basis), and our belief is that going green both environmentally and financially can be a great go-forward strategy for many companies.

Nike, Inc. (NKE) is just such a firm to leverage their model and target consumer audience interest with sustainable product lines and production facilities. On Nov. 2nd, Nike continued to talk about their new “Considered Design” product lines will increase in scope to cover six key areas: basketball, running, football (soccer), women’s training, men’s training and sportswear, as well as in tennis and ACG (All Condition Gear).

Nike Chart

Mark Parker, President and CEO of Nike stated, “As we look at how we design and develop products and run our global business, it’s not enough to be solving the challenges of today. We are designing for the sustainable economy of tomorrow, and for us that means using fewer resources, more sustainable materials and renewable energy to produce new products.”

From our perspective, we actually downgraded our view on Nike this week, from a “greatly undervalued” rating to just a plain run of the mill “undervalued” rating. This was due to the rapid price increase that occurred from October 24th to the close of last week, which was an increase of about +20.59%. That being said, we have seen a pretty rapid retreat today and may continue to see a slide back to the mid $40’s with market conditions driving most of that change. Nike will report second quarter earnings on December 17th.

Looking at the cash earnings and sales levels for Nike, we still like what we have seen recently with a current Price to Cash Earnings ratio of 11.90. Compared to our weighted average over the last ten years for Nike of 13.38, this price level is attractive and we will remain undervalued on the company. Sales are right in line with what we call our “Rationally Expected Range”, and we will watch closely as the consumer spending slowdown develops further to see if Nike’s sales numbers begin to erode.

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