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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – March 2017. 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 stock analysis showing a specific look at how Nike Inc (NKE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): NIKE, Inc. is engaged in the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. The Company’s operating segments include North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. Its portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. As of May 31, 2016, the Company focused its NIKE brand product offerings in nine categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (its sports-inspired lifestyle products) and Golf. Men’s Training includes its baseball and American football product offerings. It also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. The Company sells a range of performance equipment and accessories under the NIKE Brand name.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$99,926,355,279||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||2.93||Pass|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||156.82%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||25.98||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||8.11||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||2.93||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||0.33||Pass|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||11.57%|
|MG Value based on 3% Growth||$33.46|
|MG Value based on 0% Growth||$19.61|
|Market Implied Growth Rate||8.74%|
|% of Intrinsic Value||82.13%|
Nike Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $1.3 in 2014 to an estimated $2.31 for 2018. This level of demonstrated earnings growth supports the market’s implied estimate of 8.74% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Nike Inc revealed the company was trading above its Graham Number of $20.89. The company pays a dividend of $0.7 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 25.98, which was below the industry average of 32.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $3.1.
Nike Inc receives an average overall rating in the ModernGraham grading system, scoring a C+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||$3.10|
|Number of Consecutive Years of Dividend Growth||15|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||5/1/2017|
|Total Current Assets||$16,061,000,000|
|Total Current Liabilities||$5,474,000,000|
|Shares Outstanding (Diluted Average)||1,678,800,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.58|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$2.31|
Other ModernGraham posts about the company
|Nike Inc Valuation – November 2016 $NKE|
|Nike Inc. Valuation – May 2016 $NKE|
|5 Undervalued Companies with a Low Beta – February 2016|
|5 Undervalued Companies with a Low Beta – January 2016|
|Nike Inc. Valuation – November 2015 Update $NKE|
Other ModernGraham posts about related companies
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.