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ModernGraham Valuation: Nike Inc. (NKE)

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Company Profile (obtained from Google Finance): NIKE, Inc. (NIKE) is engaged in the design, development and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. NIKE is a seller of athletic footwear and athletic apparel worldwide. The Company sells its products to retail accounts, through NIKE-owned retail stores and Internet sales, and through a mix of independent distributors and licensees, in approximately 190 countries around the world. The Company focuses its product offerings in seven key categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, NIKE Sportswear (its sports-inspired products) and Action Sports. It also markets products designed for kids, as well as for other athletic and recreational uses, such as baseball, cricket, golf, lacrosse, outdoor activities, football (American), tennis, volleyball, walking and wrestling. In February 2013, it sold its Cole Haan affiliate brand to APAX Partners LLP.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $63.58
MG Opinion Overvalued
Value Based on 3% Growth $37.80
Value Based on 0% Growth $22.16
Market Implied Growth Rate 10.49%
NCAV $8.13
PEmg 29.49
Current Ratio 3.53
PB Ratio 6.06

Balance Sheet – 8/31/2013 (an Introduction to the Balance Sheet)

Current Assets $13,618,000,000
Current Liabilities $3,863,000,000
Total Debt $1,207,000,000
Total Assets $17,674,000,000
Intangible Assets $514,000,000
Total Liabilities $6,392,000,000
Outstanding Shares 889,000,000

Earnings Per Share – Diluted

2014 (estimate) $2.98
2013 $2.69
2012 $2.37
2011 $2.20
2010 $1.93
2009 $1.51
2008 $1.87
2007 $1.47
2006 $1.32
2005 $1.12
2004 $0.88
2003 $0.69

Earnings Per Share – Modern Graham

2014 (estimate) $2.61
2013 $2.33
2012 $2.09
2011 $1.90
2010 $1.70
2009 $1.55

Conclusion:

Nike is a company that has had good earnings growth over the years, but seems to be slightly overvalued by the market today.  Even though the EPSmg (normalized earnings) have grown from $1.55 in 2009 to an estimated $2.61 for fiscal year 2014, the market is implying a growth rate of about 10.5%.  This implied growth rate is actually right in line with what has been seen in EPSmg, but because of our margin of safety, an Intelligent Investor following Benjamin Graham’s principles will likely stay away from the company for now.  In addition, the company is trading at a high PEmg and high PB ratio, making it unsuitable for Defensive Investors.  It may be suitable for Enterprising Investors if the price drops below the margin of safety, but even so any investor should do further research before entering into any position.

What do you think?  Is Nike overvalued?  Should the company only be considered suitable for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Nike at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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