Nike’s Fitness, and RJR’s Fate After the Smoke Clears
Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Nike (NKE)
Jim: Up first today is the world’s biggest sneaker company, led by one Philip Knight, the billionaire who never takes off his sunglasses and who started Nike by selling shoes out of his car in 1964.
Mike: You’re aware of the great controversy surrounding Nike right now, aren’t you, Jim?
Jim: Whether it pays its Asian production workers peanuts?
Mike: More recent than that. I’m referring to Wall Street’s concern about what’s going to happen to the “swoosh.”
Jim: Nike’s famous logo.
Mike: Right. Apparently there were some press reports that Nike might eliminate or downplay the swoosh. But at a recent analysts’ meeting, Knight took great pains to say that it’s going to be as important to Nike as ever.
Jim: I’ll sleep better tonight.
Mike: So that sends us back to the question of whether Knight and his company have made a fortune off the backs of 11-year-old piece workers in Thailand and other Asian places.
Jim: Knight and the rest of Nike’s stockholders.
Mike: True, although its investors aren’t faring nearly as well as they were accustomed.
Jim: We’ll get to that in a second. First, I want to go on record that Nike’s fiscal 1998 annual report is one of the most annoying documents I’ve ever seen. Now, I’m no fan of annual reports in the first place. As an analyst once told me, their value is generally limited to seeing whether the CEO bought a new suit. But Nike’s report tries to be so hip, with so many fonts and graphics, that it’s a mess.
Mike: Sort of reminds me of an issue of Wired magazine, where you try to find a page that your eyes actually can tolerate.
Jim: Truth is, Nike’s report is a huge mea culpa, because this company--which created one of the world’s most renowned brands--ran into big trouble last year, and hasn’t really recovered since.
Mike: Right. Owing to its snazzy styles of athletic shoes and its savvy marketing, including its ability to lock up superstar endorsements, Nike was king of the hill. And it allowed Nike to live the manufacturer’s dream: Charging a huge markup not seen outside of the costume-jewelry business.
Jim: Then the wheels came off last year. Asia’s economic woes brutalized this company. In the States, Nike came up against tougher competition just as the overall sneaker market got saturated. Simultaneously, athletic shoes suddenly weren’t as hip among the high-school crowd, which started wearing more brown and black shoes.
Mike: Once again pointing up how, in the fashion business, these things can turn on a dime and, more often than not, leave you behind.
Jim: Adding insult to injury, Nike came in for bad publicity about the meager pay and other working conditions at its overseas factories ...
Mike: To make shoes that cost $130 or more.
Jim: Exactly. So suddenly, you had a lot of people--especially teenagers--who saw nothing cool about supporting this company that chalks up nearly $10 billion a year in sales, charges $100-plus per pair of shoes, has a logo that is so ubiquitous now that it lost its cachet, and is paying pennies an hour to its assembly line workers.
Mike: Now, Nike has talked a lot about the great things it’s doing to turn matters around, like cutting costs, because the growth in its basic shoe lines is flattening out at a horrifying pace.
Jim: In fact, Nike recently shaved some $100 million from its huge budget for paying endorsements to sports stars.
Mike: That pains me, because there’s still that lockout in the NBA, and the league has players out there who really need the money.
Jim: Talk about getting double-teamed.
Mike: Nike also is looking to create new lines, especially women’s athletic shoes and some athletic apparel. It’s boosted its minimum wages in Asia by 25% so some of those workers are actually earning a little bit more than a dollar a day.
Jim: If they haven’t been laid off in the cost-cutting program.
Mike: So I ask you: Is Nike now a stock worth owning?
Jim: This might surprise you, but I say yes.
Mike: I’m listening.
Jim: For starters, this stock is relatively cheap. After climbing above $70 a share in early ‘97, it plunged to the mid-30s this summer, but has bounced back to the low 40s. It now trades for 27 times this year’s projected earnings, about the same as the broad market.
Mike: But does it have the same growth prospects?
Jim: Yes. Nike’s popularity was knocked down a peg, but the company still has a lot going for it: a dominant market share, tremendous advertising clout, a strong if tarnished brand, and Knight at the controls. Between the cost-cutting, Nike’s push to design new styles and the whole industry’s effort to work off the excess inventories of shoes, I expect Nike’s earnings to pick up steam over the next 12 months.
Mike: You might be right over the long run, but I don’t expect much from this company over the next three or four quarters and I’d avoid the stock. Nike is battling competition that’s been strengthened by its recent weakness, it’s unclear just how strong the athletic-shoe market will be overall, and it’s an open question whether Nike can come up with the new styles that would create the old excitement once again.
RJR Nabisco Holdings (RN)
Jim: Next we turn to RJR Nabisco, which sells the interesting mix of cigarettes, cookies and crackers. It makes Winston, Camel and Salem smokes, and its goodies include Oreos, Ritz crackers and Wheat Thins.
Mike: This company reminds me of the country of Sudan, which really should be two countries instead of one. RJR Nabisco really should be two companies--one food, one tobacco--and after years of pressure from investors, that might soon happen.
Jim: A little history first. RJR Nabisco brings to mind “Barbarians at the Gate,” the book that chronicled the takeover battle for the company in the late ‘80s and how RJR ultimately became the biggest leveraged buyout in U.S. history. That deal promptly saddled the company with a mere $29 billion of debt.
Mike: And it’s never quite gotten out from under that burden.
Jim: Meanwhile, RJR is dealing with the huge tobacco litigation brought by nearly every state in the union, which has nearly all the cigarette makers staring at huge payments in order to settle the cases. Oh, and there’s one other problem: Its food group is struggling these days, too.
Mike: Now, we just got a $206-billion settlement of the tobacco litigation, which is why the stock--now trading in the low 30s--has moved up lately after a long, painful slide. And the betting is that the company now has the green light to divest its 80% ownership of Nabisco.
Jim: That reminds me, we should note that RJR Nabisco spun off about 20% of Nabisco to the public nearly four years ago. Stock of that company, Nabisco Holdings Corp., trades for around $40 a share on the Big Board under the symbol “NA.”
Mike: So now everyone is waiting for RJR Nabisco to shed the rest of the food group after the settlement is signed, because then Nabisco wouldn’t be saddled with the huge liabilities of the tobacco cases. There’s also talk it might divest its international cigarette lines. If so, Wall Street figures the combined value of the two companies will be about 25% higher than RJR Nabisco is today.
Jim: Even so, I wouldn’t buy the stock.
Mike: Why? The stock’s price-earnings multiple is down in what passes for the gutter, which is to say 14.
Jim: No question the stock is cheap. But here’s the downside: This stock already has jumped 43% since late August in anticipation of the litigation ending. I see the kicker from a Nabisco spinoff being very short term. Meantime, both RJ Reynolds and Nabisco have lots of problems in their respective markets. Just take tobacco. RJR is getting killed by its archrival, Philip Morris Cos., and its No. 1 brand Marlboro, and I’ve seen no evidence that Winston and the others can win back market share.
Mike: Won’t the settlement help?
Jim: The settlement payments, whatever they end up being, will be a much bigger drain on RJR than on the much larger Philip Morris. Don’t forget, RJR still has to service some $9 billion of debt. That’s not all. Cigarette prices are going up to help pay for the settlements, and because of higher-tax measures such as the one California just passed. That’s going to hurt U.S. sales.
Mike: Even so, I like the stock. The kick from splitting the company in two will be give the shares a major boost. Then there’s the issue of management.
Jim: Speculation is high that RJR will get new management once the litigation is settled.
Mike: Absolutely. That will give RJR new impetus. And don’t forget: A brand like Winston is nothing to sneeze at. Nor is RJR’s food business. I don’t know about your house, but in my house it’s hard to open a kitchen cabinet without finding something from Nabisco.
Jim: You mean Oreos are lurking about?
Mike: Guilty. Look, despite its recent gains, this stock has been selling at a discount to its value because of the lawsuits. But it will move up even more now that they’ve inked the settlement. That’s going to spark plenty of interest and excitement about this stock, so it’s a good buy over the near-to-medium term.
Jim: And after that?
Mike: I’m keeping my counsel.
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Nike
Monday: $44.19
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RJR Nabisco
Monday: $31.63
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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.
