Nike Hits Its Stride
By - Andrew Evan Serwer

(FORTUNE Magazine) – Owning Nike shares has been like jogging over hilly terrain. It's enjoyable only if you don't mind the bumps. The stock dipped below $7 a share in 1985, rose to $20 last year, fell again to $11, and was recently back to $20. This time, however, analysts believe the company has some hot new shoes that will sustain the stock on a long-distance run. Nike, named for the Greek goddess of victory, has been dethroned by Reebok, which took over the No. 1 spot in domestic athletic shoe sales last year. Nike almost completely misread the evolving aerobics craze. Sneaker buyers became more interested in style and comfort, characteristics they identified with Reebok, not Nike. Only the spectacular success of Nike's Air Jordan shoe has kept the company from losing even more ground. Sales for the fiscal year ended May 31 were down 18%, to $877 million, the first drop since the company went public in 1980. Many analysts believe Nike is on the rebound. While sales projections in the athletic shoe business are often about as reliable as long-range weather forecasts, these analysts seem sure Nike is about to start sprinting. They predict that the Air line of shoes, which have patented pressurized gas pockets in the soles to improve cushioning, will be the hot sneaker this fall and beyond. ''I think Nike's revenues will top $1 billion again this year,'' says analyst Keri Christenfeld of Cowan & Co. in New York. She notes that retailers across the country are reporting strong sales of the new $75 Air shoes. Orders for delivery in the six months ending November 30 are up 6% over last year. Analysts also expect Nike's earnings to surge after plunging 40% last year to 93 cents a share. Stanley Lanzet of Drexel Burnham Lambert thinks they will bounce back this year because of increased revenues and wider pretax profit margins as the company slashes overhead. Moreover, Nike's effective tax rate will slip from 50% to 42%. Lanzet figures Nike should earn $1.70 in 1988; Christenfeld projects $1.80. At $20, the stock sells for about 11 times her earnings estimate, far below the 1987 market multiple of around 18. She believes investors have valued the stock conservatively because of the company's vulnerability to the whims of fashion. But, she says, given Nike's growth prospects and sound financial position -- long-term debt is less than 5% of shareholder's equity -- the stock warrants a multiple of about 15 times 1988 earnings. On that basis the shares would fetch $27. A recent lawsuit should be a plus. Apple Records, the Beatles' old company, is suing Nike for $15 million over use of the group's song ''Revolution'' in a TV ad campaign. Analysts say the suit is probably inconsequential -- except that it is generating oodles of free publicity.