Nike: Running in Place

Lots of money is chasing sports-related brands. In April, the French company PPR, owner of Gucci and several French retailers, began a two-step, $9-billion cash takeover of Puma, paying 20 times earnings for a shoe and apparel maker with slumping sales, negative cash flow and dismal forecasts. On June 20, Italian eyeglass seller Luxottica said it would buy Oakley, a California company best know for sports sunglasses, for $2 billion in cash, or a hefty 40 times Oakley's earnings over the past 12 months. Perhaps it's fitting that Oakley has the darkest, most unreadable Web site you'll ever see, a design that makes you strain to spot its negative cash flow.

Both buyouts, which are okay with the target companies, are priced at fat premiums to both stocks' pre-deal levels. What's more, Puma and Oakley commanded their high prices even in the face of relentless palaver about tapped-out shoppers who wouldn't be caught dead anyway buying $150 athletic shoes or $700 sports glasses. The reality is that people like this stuff and they buy it.

Which brings us to Nike, possessor of one of the world's great brand names and a company that ought to be able to put the likes of Puma and Luxottica in a pair of sweat pants. But although Nike's stock (symbol NKE) has had a few spurts now and then, it has often disappointed.

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Yes, Nike's shares have done decently of late, up 9% so far in 2007 and 28% the past 12 months. Over the years, Nike's been a consistent 10% to 12% earnings grower. It has plenty of cash and little debt, keeps inventories down (though often by slashing prices at its outlet stores) and has about doubled dividends since 2002. Nike sales are strong in Asia and Latin America, regions with youthful populations and fast economic growth. Nike expects to make a small fortune from the Olympics in Beijing next year.

However, from 1996 to 2002 and from early 2004 through September 2006, Nike shares essentially flat-lined. And based on fresh earnings figures released after the market closed on June 26, Nike's share price of $53.89 is 18 times the prior 12 months' earnings per share. That's a lower P/E than you might deem appropriate for a glamour company that's worked for years to conquer the world.

The instant reaction to the earnings report was positive, as the stock went up to $55 and change in post-market-hours trading. But investors tend to view Nike more as a comfortable walking shoe than as a sneaker for a sprinter. This is the hurdle that Nike must overcome to set its stock soaring. It won't be easy.

One reason that the shares haven't done better is that Nike is an unlikely buyout candidate. Founder Phil Knight owns so much voting stock that Nike can't be sold or even rumored to be "in play" unless Knight wants it to be. He resigned as CEO two years ago but remains chairman of the board and chief insider in a company run by lifers.

Knight has always seen to it that Nike spends like mad on marketing and promotion. You wouldn't expect LeBron and Tiger to wear the swoosh for peanuts, but Nike's annual endorsement bill is a fantastic $475 million. That's one-third of its total net income. By making rich athletes immensely richer, Nike not only foregoes other opportunities to use its capital but becomes a target for protesters who accuse the company of penurious labor practices. Nike responds that it's become far more open about its political and worker affairs in general. It adds that it doesn't always get criticism. Nike got kudos last week from Climate Counts, a new organization that monitors and grades major companies' commitment to battling global warming. Nike outscored nearly all of the first 56 companies to be graded, a group that includes Coca-Cola, Google, IBM and Microsoft.

In announcing the latest earnings, Nike brass talked about "opportunities for growth." But the company didn't boost sales and earnings predictions for the coming months, raise its dividend or announce an expanded share buyback. What Nike did was meet expectations. That may be good enough Tiger Woods. But it may not be good enough to get Nike's shares sprinting.