Nike Inc (NKE, Financial) has experienced a daily gain of 8.34%, despite a three-month loss of -20.44%. The company's Earnings Per Share (EPS) stands at 3.23. But is this athletic footwear and apparel giant significantly undervalued? This article aims to answer this question through a comprehensive valuation analysis. We invite you to delve into the financial intricacies of Nike Inc.
Company Overview
Nike, the world's largest athletic footwear and apparel brand, has a diverse portfolio of key categories including basketball, running, and football (soccer). The company generates about two-thirds of its sales from footwear. Its brands include Nike, Jordan, and Converse (casual footwear). Nike's products are sold worldwide through company-owned stores, franchised stores, and third-party retailers. The firm also operates e-commerce platforms in more than 40 countries. Nearly all its production is outsourced to contract manufacturers in more than 30 countries. Founded in 1964, Nike is based in Beaverton, Oregon.
With a current stock price of $97.11, we compare this with the GF Value, a proprietary estimation of the fair value of the stock. This comparison will pave the way for a deeper exploration of the company's true worth.
Understanding the GF Value
The GF Value is a unique intrinsic value of a stock derived from a proprietary method. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. This value is computed based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Our analysis shows that Nike (NKE, Financial) is significantly undervalued. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on past business growth, and future business performance estimates. If the share price is significantly above the GF Value Line, the stock may be overvalued and future returns may be poor. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and future returns may be higher. Nike's current price of $97.11 per share indicates that it is significantly undervalued.
Because Nike is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Nike has a cash-to-debt ratio of 0.88, which ranks better than 61.97% of 994 companies in the Manufacturing - Apparel & Accessories industry. The overall financial strength of Nike is 8 out of 10, indicating strong financial health.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Nike has been profitable 10 years over the past decade. Over the past twelve months, the company had a revenue of $51.20 billion and Earnings Per Share (EPS) of $3.23. Its operating margin is 11.55%, which ranks better than 80.78% of 1056 companies in the Manufacturing - Apparel & Accessories industry. Overall, the profitability of Nike is ranked 10 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Nike is 11.6%, which ranks better than 75.07% of 1019 companies in the Manufacturing - Apparel & Accessories industry. The 3-year average EBITDA growth is 17.5%, which ranks better than 64.81% of 864 companies in the same industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Nike's ROIC is 22.27 while its WACC came in at 11.47.
Conclusion
In conclusion, the stock of Nike (NKE, Financial) shows every sign of being significantly undervalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 64.81% of 864 companies in the Manufacturing - Apparel & Accessories industry. To learn more about Nike stock, you can check out its 30-Year Financials here.
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