My 'first look' at Nike

Longtime readers know my favorite type of stock...

I'm talking about one of a high-quality, long-term-growth company that's down at least 50% – and, ideally, 80% – due to short-term headwinds and/or fixable problems.

When these companies recover, their stocks are often multibaggers – driven by both growing earnings and multiple expansion (i.e., the price-to-earnings multiple reverting to its historic high levels).

Over the years, I've made millions of dollars for myself and my investors betting on the recoveries of companies like Berkshire Hathaway (BRK-B), McDonald's (MCD) (which I discussed recently in my June 5 e-mail), and Netflix (NFLX) (which I also discussed recently in my June 10 and June 11 e-mails).

While I save my best ideas for paid subscribers – like those of our flagship Stansberry's Investment Advisory newsletter, which you can learn more about as part of a special presentation right here – longtime readers of my free daily e-mail know that I share plenty of ideas here.

For example, many of my readers profited handsomely after reading my six-part series beginning on November 1, 2022, in which I pounded the table on Meta Platforms (META) when the stock had collapsed to below $100 per share. (You can see all of those late 2022 e-mails here: November 1, November 2, November 3, November 4, November 7, and November 8.)

Today, META shares trade for more than $500.

And just last month on July 22 and July 23, I wrote about another potential candidate I had my eye on – the beaten-down shares of discount retailer Five Below (FIVE). As I noted, the stock could have another shoe to drop, so the timing didn't look right just yet... but I would keep my eye on it.

So today, I'll share a "first look" at another stock that I've been watching...

I'm talking about apparel giant Nike (NKE).

I'm a big fan of the company and have owned many of its products over the years – I especially like the Alphafly running shoes, which have carbon fiber plates that create a springboard effect that have sped up my running times by an astonishing minute per mile (depending on the distance, roughly seven minutes versus eight).

I also enjoyed Shoe Dog, the autobiography of Nike founder Phil Knight.

Since Nike went public in December 1980, at $22 per share, there have been seven two-for-one stock splits. So each initial share is now 128 shares – making the initial public offering ("IPO") price about $0.17 per share.

From that point until its peak 40-plus years later at more than $170 in early November 2021, the stock went up by more than 1,000 times (not including dividends) – making it one of the greatest growth stocks of all time, as you can see in this chart:

But since November 2021, it has been a different story – as of yesterday's close, Nike is down by 57% (versus a 13% gain for the S&P 500 Index over the same period). You can see the fall in this next chart:

I always start my analysis of a company by looking at its historical financials, ideally going back 20 years to see what happened during the global financial crisis.

This chart shows Nike's revenue and operating income for fiscal years ending May 2005 through May 2024:

As you can see, Nike was an incredible growth story... but if you look closely, operating income flatlined from 2016 to 2019, which should have been a warning flag. But then after an initial hit due to the pandemic, both revenue and profit soared in the aftermath – driving the stock to its all-time high at the end of 2021.

Since then, revenue rose in 2022 and 2023 while operating income declined... and then the two diverged in 2024, as revenue was flat while operating income recovered somewhat.

Keep in mind that 2024's operating income was only down 6.6% from the peak in 2021, so I would expect the stock to be down – but not by 57%!

So let's see what the cash-flow statement tells us – take a look at this chart:

I like what I see here. Nike gushes cash... has minimal capital expenditures ("capex")... and cash from operations has risen strongly in the past three years – hitting an all-time high in 2024.

Now in this next chart, let's look at how Nike has returned its huge free cash flows to its shareholders in the form of dividends and share repurchases:

Once again, I like what I see here – a steadily rising dividend (the stock currently yields about 2%) and large share repurchases.

I'm especially impressed that Nike reduced its share repurchases by 86% from 2019 to 2021 as the stock soared and became substantially overvalued, but then as it declined sharply, the company has once again ramped up repurchases.

This has resulted in a 29% decrease in shares outstanding in the past two decades, boosting earnings per share by 41%. In this next chart, you can see the reduction in shares outstanding:

Finally, let's take a look at the balance sheet with Nike's net cash (cash minus debt). Here's the chart:

We can see that the company historically had a healthy amount of net cash... but then took on $9.2 billion of debt (offset by increased cash of $4.1 billion) in 2020 to maintain its dividend and buy back more than $3 billion of stock during the pandemic, as free cash flow temporarily plunged.

But then, only one year later, Nike returned to a net cash position in 2021 as free cash flow recovered and the company cut back on share repurchases.

Since then, Nike's net debt has fluctuated around zero as the company has used its strong free cash flow to steadily increase its dividend while significantly ramping up share repurchases.

So with operating income only down 6.6% from its peak, why is the stock down 57%?

Simple: the stock got ahead of itself and, at its peak, was trading at over 40 times trailing earnings.

Since then, it has been more than cut in half – and is trading at 19.5 times trailing earnings.

Now the math is easy: earnings down 7% plus multiple down 50% equals a stock down 57%...

In summary, I like what I see based on my first look at Nike's historical financials.

While growth has slowed down and become more erratic, Nike's overall financial picture is one of an exceptionally strong company.

In Monday's e-mail, I'll continue my analysis by looking at what has caused the stock's collapse and whether it's a value trap or possibly a great buying opportunity... Stay tuned!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.