Evaluation and the Three Rules - NIKE (NKE) Analysis - Part 5

For the past 10 year, Nike's P/E never dropped below 17, now at 11, price/sales, used to hover around 1.5, now at 1.1. So nothing to elaborate here, its evaluation is at historical low; pretty much it is the same situation for every company still alive today.

Now let's put it in the recession background.

My first article on the blog, click here if you'd like to read, talked about the three rules to screen stocks in today's market. Let's plug it in for the NKE case.

1) Big & Safe: As a company with 20 billion dollar revenue and 20 billion market cap, Nike is big. With almost 1 billion dollar free cash in hand and a current ratio around 3, it is pretty safe. Also NKE is the No. 1 in sportswear. If the entire industry has to go down, Nike may well be the last one.

2) International Revenue: see the table (all numbers in million except percentage).

Areas	2008	%	2007	%	2006	%
United States	6378.00	34%	6107.10	37%	5722.50	38%
Europe, Middle East and Africa	5620.40	30%	4723.30	29%	4326.60	29%
Asia Pacific	2881.70	15%	2283.40	14%	2053.80	14%
Americas	1154.10	6%	952.50	6%	904.90	6%
Other	2592.80	14%	2259.60	14%	1947.10	13%
Total	18627.00		16325.90		14954.90

As of may 2006, around 38% Nike's revenue is from the United States, and in 2008, the number dropped to 34%, and the quarter ended December 2008, 33%. Also you can see NKE is not tied to any single market/area on the globe. Sure we are having a worldwide recession, but it takes different forms in different countries. With the revenue as balanced as NKE, I can't expect any other company could better mitigate the impact.

3) Recover from depression: for me, NKE fits both types of companies I mentioned in the initial blog. I will cover the growth part later. What's more, I think the sportswear industry should be the one recovering earlier and faster from the recession. Nike is not a luxury brand, but their products are not cheap either. The recession forces people to scale back spending, reducing expenses in categories that are not everyday needs. Therefore, you see Walmart thrives but Macy's suffers. The government seems to be trying to put more money into the hands of the ordinary consumers to stimulate the entire economy - seems reasonable to assume people go get a pair of nice sneakers when finally there is some extra cash left in the pocket.