Warren Buffett has a long history of investing in the best consumer brands. Berkshire Hathaway owns several, including See’s Candies, Dairy Queen, and Fruit of the Loom. In addition, two of the Top Berkshire Hathaway Stocks are Coca Cola and Apple.
If Buffett has already bought Nike (NYSE: NKE) stock, that would certainly fit the pattern of the types of companies it has already invested in. Here are three reasons Buffett would love Nike.
1. A simple and marketable product
Buffett has often taught the importance of investing only in companies that you understand. Anyone can understand sneakers. Nike has been making performance shoes since 1972, and it’s a safe bet that they will continue to dominate the footwear market for a long time to come.
When Buffett invested $ 1 billion in shares of Coca Cola in the late 1980s, he recognized management’s use of great marketing and financial skills to develop the product around the world. Nike shares a similar success story.
The signing of big sports stars like Michael Jordan has made Nike a household name. Most of the top teams in this year’s NCAA basketball tournament wear the Jordan or Nike brand. Getting its sportswear on national television in front of large audiences is a big reason Nike has created one of the most iconic brands in the world.
2. A large competitive gap
If a company has been doing the same for almost 50 years while delivering wealth creation returns for shareholders, it is a sign that the company has a sustainable competitive advantage – another key characteristic that Buffett seeks.
The sportswear market is very competitive. Consider that Nike’s $ 38 billion in revenue over the past year is just over 10% of the $ 300 billion spent annually on sportswear, according to Morgan stanley. Obviously, many buyers of sportswear are still not Nike customers.
Still, the company has some serious advantages over its competitors. Nike holds patents on cushioning technology, manufacturing techniques, and even product design. The creative sparkle that produces these colorful sneakers in a range of styles has inspired other companies to step up their game, but they don’t have the swoosh logo.
One of the reasons Buffett invested in Apple stocks was the huge pull the iPhone has on people. Buffett would also appreciate the appeal that Nike has for the consumer. Sneakersheads check Nike’s SNKRS app daily for the latest news on upcoming releases. Since the pandemic hit the United States in March 2020, Nike has added 70 million new members to its digital ecosystem.
Buffett’s investment record reveals that he likes to invest in companies, not great CEOs. He often quoted famous investor Peter Lynch, who loved investing in companies so much that any “idiot” could run them, because sooner or later some idiot would probably run them. The point is, you want to invest in a business that doesn’t depend on a brilliant entrepreneurial spirit but can thrive on its own merits.
Three CEOs have led Nike since co-founder Phil Knight stepped down in 2004. Regardless of who ran the company, it has continued to deliver above-market returns to shareholders. It is the sign of a great company.
And Nike has always had much better returns on invested capital than its rival. Adidas, as well as other top consumer discretionary brands.
Over the past three years, Nike has also implemented its direct-to-consumer infringement strategy to double the speed of time to market for new products and develop e-commerce sales. These efforts are paying off.
Nike was able to maintain positive sales growth in the nine-month period ending in February, as new styles of sneakers continue to hit the market at a breakneck pace to take advantage of growing demand. In the most recent quarter, digital sales climbed 59% year-over-year, helping to increase total revenue by 3%.
These are solid results given the tough retail environment during the pandemic, and they are a testament to the phenomenal strength of the Nike brand in the market.
The only thing Buffett might not like about Nike stocks is valuation. Stocks are currently trading at a high forward price-to-earnings ratio of 42, which is well above the levels Buffett typically pays for a stock. Going back to the Coca-Cola and Apple examples, both stocks were trading below 20 times earnings when Buffett made these investments.
Nonetheless, I think Nike has all the qualities that Buffett would want to see in a company that deserves to be owned for the long term.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.