👟Business Overview

🎯Key Metrics

Total: 7/17

• +1 ✅ Projected Operating Margin: 13.65%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 5.88%
• +1 ✅ Last 5-Year ROIC: 18.60%
• +1 ✅ Estimated Cost of Capital: 11.54% (less than ROIC)
• +1 ✅ Last 5-Year Shares Outstanding CAGR: -1.28%
• +1 ✅ Projected 5-Year EPS CAGR: 16.37%
• +0 ⚠️ Projected 5-Year Dividend CAGR: 9.13%
• +1 ✅ Moody’s Rating: A2
• +2 ✅✅ Morningstar Moat: Wide
• -1 ❌ Morningstar Uncertainty: High

Nike runs with a solid operating margin above the ~10% mark showing it still has some competitive advantage over competitors even with the maturity of its business and a highly competitive industry. Despite currently having revenue growth below the economy growth rate, its projections point to a slightly higher than economy growth rate of ~5-6% over the next couple of years. Also the fact that the ROIC is almost double its cost of capital is always good to see.

However, there are some risks for the company, represented by the High uncertainty rating, showing that Nike, despite having a history of success, needs to keep reinventing itself providing, as always, great products to its clients.

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• Historical P/E – we assume mean reversion to the historical P/E values;
• Historical P/S – we assume mean reversion to the historical P/S values;
• DDM – the fair value is estimated by projecting the dividend payments across the following years and discounting them to the present value using the estimated Cost of Capital;
• Historical Dividend Yield – we assume mean reversion to the historical dividend yield;
• Historical P/CF – we assume mean reversion to the historical P/CF values;
• Historical P/B – we assume mean reversion to the historical P/B values.

I’ll put more weight on the DCF and EPS methods and only then the historical ones. Given the ever-changing landscape of the world and the whole business the company operates, it seems unreasonable to assume a higher probability of mean reversion to the historical averages of the company.

Cost of Capital

I’ve used the latest annual and quarterly financial statements of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s provided a rating for the company I used it as the debt rating.

Cost of Capital: 11.54%.

This value will be used later as a discount rate in the valuation methods.

Discounted Cash Flows (Weight: 25%)

I’ve used the latest annual and quarterly financial statements of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming that the company starts at the previously estimated cost of capital and then will converge gradually to the average cost of capital of its industry;
• Terminal Tax Rate – The company starts at around ~18% of tax rate and then gradually converges to this terminal rate, equal to the industry average;

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 32.09 dollars for Nike.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Nike seems to be overvalued given that its current price of 65.46 dollars is well above P90. From these simulations we can extrapolate that there’s 90% probability that the stock is overvalued at the current price.

As always take this single output, from this DCF valuation method, with a grain of salt. Let’s move on to the other valuation methods to get a clearer picture.

EPS Growth (Weight: 15%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 25 PE for the company, so a little below its current averages.

Then again, I used the Monte Carlo simulations to check how the estimated fair value changed as my assumptions were modified.

Using this method, Nike that is currently priced at 65.46 dollars seems to be fairly valued being currently valued around the median of the simulations.

Historical EV/EBITDA (Weight: 12%)

The current EV/EBITDA (Enterprise Value / Earnings Before Interests, Taxes, Depreciation and Amortization) ratio is at its 7-8 Year average. This means that the company is fairly valued by this metric. Assuming a mean reversion to its historical average of 27.04 we can assume a fair value of 66.20 dollars.

Historical P/E (Weight: 12%)

The current P/E (Price / Earnings) ratio is above its 7-8 Year average. This means that the company is a little overvalued or at least fairly valued by this metric. Assuming a mean reversion to its historical average of 35.56 we can assume a fair value of 60.32 dollars.

Historical P/S (Weight: 10%)

The current P/S (Price / Sales) ratio is below its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 3.49 we can assume a fair value of 91.87 dollars.

DDM – Variable Growth (Weight: 8%)

Now we look at a Dividend Discount Model (DDM). This will allow us to value the company, using its dividend payments and the overall growth of it. In this type of DDM we’ll set the dividend to grow at an initial rate that then over time moderates and declines to a given terminal stable growth that will be maintained “forever”.

For the stable growth, I normally use the growth rate of the economy the company is based on, namely the 10-Year bonds of the currency used by that economy country. Given that Nike is an American company, using dollars, we’ll use the 10-Year Bonds of United States.

As you can see below I started the dividend growth at 9.13% (analysts expectations) and then slowly the growth moderates to 4.26% (the risk free rate – 10-Yr bonds of US). Also note the use of the Cost of Equity, calculated previously when we also calculated the Cost of Capital.

Then, as always, we can also use a Monte Carlo simulation to dive deeper into the valuation 🤓

As you can see, by this method, Nike seems overvalued because its current market value is above the upper range of the simulations (P90).

Historical Dividend Yield (Weight: 8%)

The current Dividend Yield ratio is above its 7-8 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 1.32% we can assume a fair value of 121.99 dollars.

Given the excessive growth in the amount paid in dividends over the last 1-2 years, relative to the available cash flow, its normal that the dividend yield seems very high comparing it to the historical averages.

Historical P/CF (Weight: 5%)

The current P/CF ratio is at its 7-8 Year average. This means that the company is fairly valued by this metric. Assuming a mean reversion to its historical average of 32.34 we can assume a fair value of 66.76 dollars.

Historical P/B (Weight: 5%)

The current P/B (Price / Book Value) ratio is below its 7-8 year average. This means that the company is undervalued by this metric.Assuming a mean reversion to its historical average of 12.82 we can assume a fair value of 95.84 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I will pick a fair value of 56.47 because I believe Nike will maintain its wide moat and remain a strong brand in sportswear.

Please, as always, remember that the fair value estimate has a 100% probability of being wrong and it will never be a precise number, even if it has decimals next to it 😮

Overall it seems Nike is overvalued at its current market price.

Fair Value: 56.47 dollars.