Nike Inc. Quarterly Valuation – November 2014 $NKE
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – November 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Nike Inc. (NKE) fares in the ModernGraham valuation model.
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 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 Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $93.78 |
| MG Value | $76.20 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $43.21 |
| Value Based on 0% Growth | $25.33 |
| Market Implied Growth Rate | 11.48% |
| NCAV | $6.91 |
| PEmg | 31.47 |
| Current Ratio | 2.81 |
| PB Ratio | 7.48 |
Balance Sheet – August 2014
| Current Assets | $13,540,000,000 |
| Current Liabilities | $4,813,000,000 |
| Total Debt | $1,195,000,000 |
| Total Assets | $18,521,000,000 |
| Intangible Assets | $413,000,000 |
| Total Liabilities | $7,416,000,000 |
| Outstanding Shares | 886,200,000 |
Earnings Per Share
| 2015 (estimate) | $3.55 |
| 2014 | $2.97 |
| 2013 | $2.71 |
| 2012 | $2.37 |
| 2011 | $2.20 |
| 2010 | $1.93 |
| 2009 | $1.52 |
| 2008 | $1.87 |
| 2007 | $1.47 |
| 2006 | $1.32 |
| 2005 | $1.12 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $2.98 |
| 2014 | $2.61 |
| 2013 | $2.33 |
| 2012 | $2.09 |
| 2011 | $1.90 |
| 2010 | $1.71 |
Dividend History
Conclusion:
Nike Inc. is suitable for the Enterprising Investor but not the Defensive Investor, who is concerned by the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns as the company passes all of the investor type’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.90 in 2010 to an estimated $2.98 for 2014.  While this level of demonstrated growth is strong, it does not support the market’s implied estimate of 11.48% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.
Be sure to check out previous ModernGraham valuations of Nike Inc. (NKE)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Nike Inc. (NKE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer:  The author did not hold a position in Nike Inc. (NKE) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
