Motley Fool: Nike’s strong performance makes it a stock worth watching

Nike (NYSE: NKE) stock has averaged annual gains of 18 percent over the past 20 years, and despite its market value topping $65 billion, the company isn’t done growing.

Nike’s latest quarter featured revenue up 13 percent over year-ago levels and earnings per share up 4 percent, both exceeding analyst expectations. Big markets were particularly strong, with revenue increases of 12 percent in North America, 22 percent in Western Europe and 17 percent in Central and Eastern Europe.

Growth in China hasn’t been as strong as hoped for, though, and the company has been facing currency headwinds in many markets recently. Another concern is growing competition from Under Armour.

On the plus side, orders surged by 12 percent to $10.9 billion, and Nike has been boosting its international marketing efforts, particularly in India and China. Nike should also benefit from a five-year, $1.1 billion deal with the NFL to supply gear, and from growth in yoga apparel and wearable technologies such as its FuelBand.

Nike is an undisputed industry leader, with an enormously valuable brand power and generating solid performance on a global basis. With its forward-looking price-to-earnings (P/E) ratio near 21, the stock isn’t quite a screaming bargain right now. Consider adding it to your watch list or perhaps buy into it gradually. (The Motley Fool recommends Nike and Under Armour and owns shares of both.)

Ask the Fool

Q: Is it true that dividends are taxed twice? – S.N., Kankakee, Ill.

A: Yup, it is. Here’s why: Imagine that Economical Aviaries (ticker: CHEEP) rakes in $100 million in sales, and after subtracting expenses, keeps $20 million as its operating profit. It will then be taxed on that. The U.S. corporate tax rate is 35 percent, though many companies shield much of their income, with some of them paying an effective rate in the single digits – or lower!

Economical Aviaries can do many things with its post-tax earnings. It can buy back and retire some of its own shares (increasing the value of remaining shares), build more factories, hire more workers and so on. If it pays dividends to shareholders, though, the shareholders will be taxed on that as income. Presto – that money has now been taxed twice.

This is why some investors prefer to see a company using its money to build more value for shareholders without paying out dividends. It’s also why some companies opt to repurchase shares, rewarding shareholders in a tax-free way. Repurchasing shares is wasteful, though, when a stock is overpriced.

Q: Should I favor companies with lots of cash and no debt? – P.W., Spokane.

A. Not necessarily. A big pile of cash does give a company the flexibility to act quickly when various opportunities arise. But many successful companies manage their cash balances to near zero. They use the money to buy back shares, pay dividends and acquire other companies, among other things. If they suddenly need cash, they draw on their lines of credit.

Debt can be OK as long as a company can manage it, and too much cash can be unproductive and, arguably, even wasteful.

My dumbest investment

When the iPod came out in 2001, I was going to invest in 100 shares of Apple’s stock at around $16 per share. But Bill Gates came out with a statement saying that the iPod was a passing fad, and someone asked a question that made me decide not to buy Apple: If the iPod holds 1,000 songs and it’s a dollar per download, how likely is it that people will pay $1,000 to fill an iPod?

So I bought 100 shares of Cypress Semiconductor instead. My lesson: Discount anything that’s said by the CEO of a company’s competitor and question other skeptics, too. – T.M., online

The Fool responds: Due to a 2-for-1 stock split in 2005, the cost basis on a $16 stock purchase would have been $8, and the stock has recently traded near $540. That means your investment would have grown more than 67-fold. Ouch! (Shares of Cypress Semiconductor have nearly tripled.)

It’s good to consider skeptics’ arguments, but always make up your own mind. And to be fair, back in 2001 it was far from clear that Apple would become such a huge success.