What Does Apple Have to Do With Nike?

With shares of Nike (NYSE:NKE) trading at around $61.76, is NKE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

You have most likely read about Apple’s (NASDAQ:AAPL) iWatch. Many questions and rumors have been swirling around about its release date, its price, and its features. In regards to the latter, there have been many reports that this device will be fitness-friendly. The iWatch might be capable of monitoring your vitals and indicating whether or not you have gotten enough exercise for the day. In a world where health and fitness consciousness is increasing daily, these features have a lot of potential when it comes to popularity. So, you might be wondering, “What does this have to do with Nike?”

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Two important points needs to be made:

One, if the iWatch takes off as many expect, and if the health and fitness-related features are big parts of the device’s popularity, then more people will join the fitness craze. Can you see where this is going? If not, Nike rules the global sports apparel market. If more people are into fitness thanks to the iWatch, then more people will want fitness apparel. This, in turn, would be a big plus for Nike.

Two, Apple CEO Tim Cook is on the Nike board of directors. A possibility exists that there will be some form of partnership between Apple and Nike with the iWatch. Perhaps it will relate to an app, but this is simply speculation.

Looking at Nike on an individual basis, it’s a strong cash flow generator that doesn’t require much leverage. Innovation is constant, management is strong, and rising incomes in emerging markets mean increased international growth potential. That said, Europe has been weak, and China has been inconsistent.

On a fundamental basis, Nike is trading at 20 times forward earnings and sports a profit margin of 9.22 percent. Under Armour (NYSE:UA) has been a thorn in Nike’s side for a long time. It has outperformed Nike by a wide margin over a three-year time frame. And this column has been bullish on Under Armour since December. While the long-term outlook for Under Armour is still good, the stock is beginning to get expensive. Its trading at 32 times forward earnings. For comparative purposes, it has a profit margin of 6.34 percent (not as high as Nike). Nike also has an ROE of 21.89 percent whereas Under Armour has an ROE of 16.07 percent. Furthermore, Nike currently yields 1.40 percent whereas Under Armour doesn’t offer any yield. And perhaps most important of all, Under Armour doesn’t have a relationship with Apple.

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Nike has been a consistent performer for decades. However, the last month has been subpar.

1 Month Year-To-Date 1 Year 3 Year
NKE -4.15% 20.56% 22.69% 78.41%
UA -0.07% 22.38% 17.69% 245.9%
LULU -15.30% -11.61% 8.82% 222.7%

At $61.76, Nike is trading below its 50-day SMA, but still above its 200-day SMA.

50-Day SMA 63.43
200-Day SMA 56.63

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Nike is stronger than the industry average of 0.20.

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Debt-To-Equity Cash Long-Term Debt
NKE 0.03 4.04B 321.00M
UA 0.07 255.72M 60.44M
LULU 0.00 588.42M 0.00

E = Earnings Have Been Strong

Earnings and revenue have consistently improved since 2010.

Fiscal Year 2009 2010 2011 2012
Revenue ($) in millions 19,176 19,014 20,862 24,128
Diluted EPS ($) 1.51 1.93 2.19 2.37
Quarter May. 31, 2012 Aug. 31, 2012 Nov. 30, 2012 Feb. 28, 2013
Revenue ($) in millions 6,470 6,669 5,955 6,187
Diluted EPS ($) 0.58 0.62 0.42 0.95

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Many analysts are stating that Nike is too expensive at the moment. It might be expensive, but if you’re looking for a winning long-term investment, then Nike is never too expensive. Nike always finds a way to grow. Current potential catalysts for growth include emerging markets, increasing interest in female sports apparel, and the iWatch impact.

Nike is one of the most well-run and cost-efficient companies in the world. Even if the broader market were to suffer a steep decline and Nike suffered, it would only be a matter of time before it recovered.

As always, Nike is an OUTPERFORM.

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NOTE: This will be my last day at WSCS. I will be moving to Motley Fool on Monday. Thanks to all readers who have followed this column!

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.