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What about a stock that has best of both worlds?
Nike (NYSE: NKE) is a rare example of a stock with both growth and value. Not only does Nike offer investors significant growth potential, thanks to its world-class brand and global scale, but it also trades for a modest valuation.
Investors should consider adding Nike to their portfolios, while the stock is still cheap.
Growth At A Reasonable Price
Over the past year, the strong U.S. dollar, combined with slowing future orders—a key metric for Nike—have caused the stock to stumble.
However, Nike is still generating growth at a solid rate. For example, last fiscal quarter, currency-neutral revenue increased 7% from the same quarter last year.
And, the company expands margins through cost discipline. It also uses cash flow to repurchase its own stock, which helps grow earnings. Last quarter, earnings per share jumped 24%.
According to market research firm Brandirectory, Nike is the 28th most valuable brand in the world in 2016. Nike’s brand is worth approximately $32 billion, up 13% from last year.
The lucrative Nike brand lineup includes NIKE Brand, Jordan Brand, Hurley and Converse. It sells its athletics products to retail accounts through retail stores and internet websites and through a mix of independent distributors.
And of course Nike’s iconic “swoosh” logo is ubiquitous at sporting events worldwide.
Nike’s strong brand delivers pricing power. For example, Nike generated more than 10% growth in the over $100 sneaker segment last quarter.
These qualities provide Nike with large free cash flows. For example, in fiscal 2016, Nike generated $2 billion of free cash flow. The cash has piled up on the balance sheet: Nike ended last quarter with more than $6 billion in cash and investments. This cash will give Nike the ability to continue investing in its core growth initiatives, including new product development and direct-to-consumer sales.
Nike is a highly profitable company, and enjoys strong profit margins. The company had a 44.8% gross margin over the first nine months of its current fiscal year. Nike brought in profit of $3.2 billion through the first three quarters, along with nearly $26 billion of revenue.
This shows the strength of Nike’s brand, which is carrying over into new markets. Nike is a marketing juggernaut in sports apparel and shoes worldwide. Last quarter, Nike generated double-digit growth in Western Europe, China, and other emerging markets.
China in particular is a very attractive market for Nike. With a population of 1 billion, and an expanding middle class, China is a prime growth market for Nike moving forward.
Aside from growth, there are many reasons to consider buying Nike stock.
A Unique Combo of Value & Income
Nike’s share price fell after the company reported earnings last quarter, but the market’s disappointment could be temporary.
The company continues to grow, and Nike is a tempting value. Shares trade for a P/E of 22, which is below the average S&P 500 Index valuation. The broader index, on average, has a P/E of 26.
This means Nike is potentially undervalued, given its brand strength and growth potential.
Plus, Nike stock has something to offer investors looking for dividends. Nike’s annual dividend of $0.72 per share represents a 1.3% dividend yield.
Nike also grows its dividend at high rates each year. The company has increased its dividend for 15 consecutive years, including a 13% increase last year.
Nike Stock: Slim Price, Big Growth Potential
Nike stock has done very little in the past year. It’s down about 1% in the past 12 months, while the Dow Jones Industrial Average is up 20% in that time.
The strong U.S. dollar and slowing future orders growth have weighed on the stock.
The underperformance of Nike stock gives investors the opportunity to buy shares at a reasonable valuation, with plenty of future growth potential.
With a 1.3% dividend yield as a kicker, Nike stock looks like a buy.
Disclosure: The author is personally long NKE.