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Thursday, October 26, 2006

Analyzing Nike (NKE) & Sanofi Aventis (SNY)

By Yaser Anwar, CSC of equity Investment Ideas

Nike has surpassed its industry as well as the consumer discretionary sector in terms of ROIC. NKE has sustained a 19% or greater return for each of the past four years, which is very good.

I see a significant opportunity for Nike to penetrate the women's footwear and sports apparel markets, as brand sales to this gender represent about 20% of total Nike brand sales.

Another positive about NKE is the share repurchases under a new four year, $3 billion stock repurchase program. This should reduce the share count by 4% to 5%.

I'm always happy to see positive use of FcF by management. In NKE's case the uses of free cash flow in recent years have been a 19% increase in the cash dividend in early 06, as well as ongoing share repurchases. Cash flow per share has been constantly on the rise by double digit % each year for the last 4-5 years.

Consumers show no signs of slowing down, this bodes well for NKE too.

Sanofi Aventis (SNY)

SNY has done well when it comes to its financials. Net cash generated from operations totaled $7.8 billion in 05.

After asset disposals of $820 million and dividends of $1.9 bn, FcF was $5.1 bn. This massive FcF will allow SNY to increase R&Ds & hopefully increase dividends.

According to management, SNY had realized cumulative merger synergies of close to $1.7 billion through its merger with Aventis, equal to 87% of total expected synergies.

Management also has done to reduce net debt drastically ($11.7bn from 17bn), another good use of the massive FcF.

SNY's pipeline is wicked good too. SNY has a strong presence in treatments for thrombosis with its Plavix receptor, and Lovenox low molecular weight heparin. SNY is also strong in the anti-diabetes class with Lantus, the largest selling insulin in the US, and Amaryl, an oral treatment of type 2 diabetes.

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