2. Financial Modeling and Valuation Baozheng Ge
1
Johns Hopkins University – Student Research
Consumer Goods Sector, Footwear & Accessories Industry
New York Stock Exchange
Nike, Inc.
Date: 5/29/2015 Current Price: $50.84 (5/29/15) Recommendation: Hold
Ticker – NYSE: NKE Headquarter: Beaverton, OR Target Price: $59.92
Highlights
According to the result from various valuation approaches done to Nike, we faithfully suggest
our clients to hold Nike’s stock for the upcoming period, which would have a projected 17.86%
increase compared to its current market price $50.84 on May 29th
, 2015. And the main reason
come up with our recommendations is as follows:
Valuation – According to the valuation we have done to Nike, the intrinsic share value
is targeted at $59.92, which is much higher than the current market price $50.84. There
is wide range of space for the increase of its share price. The valuation method we
implemented is Full Pro Forma approach.
Expansion Plan – Nike plans to grow the NIKE Brand in all six of its geographies
including driving mid-single-digit growth through broader expansion in its developed
geographies (North America, Western Europe, and Japan) and to invest aggressively in
its developing market geographies (Greater China, Central & Eastern Europe, and
Emerging Markets) targeting low double-digit growth.
Growth Drivers – Nike keeps growing its revenue on a yearly basis with a relative stable
rate of growth which is around 10% throughout the time and it is a good indicator for all
the investors because the latitude of growth rate of sales is the main driver for larger
future cash flow into the company.
Business Description
NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic
footwear, apparel, equipment, and accessories for men, women, and kids worldwide. The
company offers products in eight categories, including running, basketball, football, men’s
3. Financial Modeling and Valuation Baozheng Ge
2
training, women’s training, sportswear, action sports, and golf under the NIKE and Jordan
brand names. 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. In addition, the company sells sports apparel and accessories; and markets apparel
with licensed college and professional team and league logos. The company was formerly
known as Blue Ribbon Sports, Inc. and changed its name to NIKE, Inc. in 1971. NIKE, Inc.
was founded in 1964 and is headquartered in Beaverton, Oregon (Business Summary, n.d).
NIKE, Inc. includes five distinct brands, each with a powerful connection to its customers:
NIKE Brand designs, Converse, Inc, Hurley International LLC designs, Jordan Brand designs
and NIKE Golf designs. NIKE, Inc. is a growth company. Over the last 10 years, they have
more than doubled their revenue. According to Nike’s FY10/11 Sustainable Business
Performance Summary, their overall employee base grew to approximately 48,000 at the end of
FY13, an increase of 10,000 employees (Business Overview, n.d).
There are five major competitive advantages about Nike. First is branding, the creation of a
strong image among its teenage customer base—a must have mentality that allows the company
to charge premium price over its competitors. Second is scale, the cost savings associated with a
larger corporate size. Nike has close to $29 billion in revenues by the mid-2014, almost twice
its closest competitor, Adidas AG. Third is scope, the cost savings associated with offering
different products by a single corporation for sale, rather than products by different
corporations. Nike has a broad range of shoes, clothing, and gear, catered to men, women, and
children. Fourth is customization, the benefits associated with offering customer-tailored
solutions. NikeiD allows customers to customize some of the products they buy. The last is
innovation, the discovery of new products that have a number of distinct features separate from
those of conventional competing products – features that stir up emotion and desire, seducing
consumer fantasy (Mourdoukoutas, 2014).
Financial Analysis and Valuation
As seen from the past 5-year performance, Nike did a nice job in keep growing its revenue on a
yearly basis with a relative stable rate of growth which is around 10% throughout the time. This
is a good indicator for all the investors because the latitude of growth rate of sales is the main
4. Financial Modeling and Valuation Baozheng Ge
3
driver for larger future cash flow into the company. And the GOGS takes about 54.6% to 56.9%
of the total sales with a gross margin of 0.46 that is slightly higher than the industry average,
0.39. As a marketing-oriented company, SG&A expense for Nike took up higher percentage of
sales from 30.7% to 32.2% during last 5 years, but the operating margin for Nike still has a big
advantage over its competitors, which is 6% higher than the industry norm (Competitors, n.d).
Since we are optimistic about Nike’s future revenue growth, the projected net income from
2016 to 2020 has a gradual increasing trend overall.
When we look at Nike’s balance sheet from 2011 to 2015, we see an obvious decreasing in total
accounts receivable from 15% to 10.9% of sales, which indicates a more efficient cash
collection cycle. Moreover, Nike constantly bought in PP&E during this time, however,
PP&E’s growth is not as remarkable as that of sales and during the year 2015, Nike might have
a large sale of its PP&E because in this year, the accumulated depreciation has a 0.05 billion
decline compared to the year before.
For all the financial ratios, the most memorable thing is the continuous increase in EPS from
$1.12 in 2011 to $1.90 in 2015 and we estimated that the EPS will keep growing in the
following years till 2020 to a level of $3.10. This is certainly a good news for current and
perspective investors. The ROE seems to grow healthily from 2011 to 2015, but then it will
experience a downward trend as we estimated from 2016 to 2020 and this is due to the fewer
dividends that will be paid out in the following years which increases the shareholder’s equity
and drives down the ROE later on. The reason we estimated there will be less dividend is that
during this year’s investors meeting, the CEO of Nike, Mark Parker, announced plans to invest
$500-600 million in capital over the next five years to develop the Direct to Consumer business
and build capabilities to support both owned and wholesale retail productivity and performance
in order to build and strengthen its global retail presence (Parker, 2010). The leverage ratio for
Nike fluctuated in a small range, an obvious increase in the year 2013 and following decrease
till the year 2020, but overall the capital structure is relatively stable and in the future, Nike
would rely more on its equity rather than its debt as seen from the leverage. We believe this
would cause an increase in future cash flow because the interest expense would also come down
with the debt to a certain level.
5. Financial Modeling and Valuation Baozheng Ge
4
For the valuation part, there is one thing need to mention that we come up with all negative
numbers for net debt throughout 2011 to 2015, which means during this time, Nike always got
excessive cash & ST investment over all the debts. We calculated WACC using three
approaches, Gordon per-share dividend, classic CAPM and tax-adjusted CAPM. Finally we
took the average of the last two methods, because the number generated from the first method is
deviated from that of rest two methods. The WACC we obtained is around 0.07. Moreover, for
enterprise value computation, we use long-term FCF growth rate as 3%, although the recent
FCF growth rate is higher than this. The reason is that we need to hold a conservative mind
about future growth, because there will be lots of unpredicted things happening in the future.
Next, we took Pro Forma and Simplified DCF methods and came up with share values as
$59.92 and $66.21. And at this point, we choose to adopt the answer by Pro Forma method,
since it is the more accurate method with less assumptions though. However, both numbers
suggests that Nike, at current stage, is pretty much undervalued with a current market price of
just $50.84.
Investment Risk and Opportunities
There are certainly some investment risks currently. First is considered as market risk, which
mainly comes from its competitors. Among them is Baltimore-based Under Armour
(NYSE:UA), which is nearly five times smaller than Nike in terms of market capitalization and
generated revenue of around $3 billion for all of 2014 – a 29% jump over last year. More than
90% of that revenue was generated in the U.S., which means Under Armour will pose an even
greater threat as it begins to ramp up its international expansion later on. The second is about
economic risk. One of Nike's biggest challenges in delivering consistent growth lies in
managing currency headwinds. There was a shares plunging two quarters ago after CFO Don
Blair told investors that "this year's devaluation of developing market currencies will be a
significant drag on next year's reported revenue, gross margin, and profit growth." Although
Nike has multiple financial levers it can pull to mute the effects of such currency volatility,
including temporarily minimizing the level of receivables in those respective markets. But that
doesn't mean Nike will be capable of perfectly managing such fluctuations in perpetuity
(Symington, 2014). The third one is called operational risk. From the financial analysis about
6. Financial Modeling and Valuation Baozheng Ge
5
10 past and future years, we have seen that the Nike’s asset turnover ratio started to drop since
2014 and this trend would continue till the year 2020 without exception. In addition, Nike’s
ROE is also experiencing the same kind of problem. Those phenomenon suggests that there is a
lack in Nike’s operating efficiency and this lack would further lead to the decrease in its
profitability performance. All the perspective investors need to consider about the above
investment risks before you make your decision.
However, there are also opportunities associated with it. According to the Monte Carlo
Simulation we have done using crystal ball, Nike has 60.24% of possibility to be priced higher
towards its actual share value we computed in the valuation part and the total upward possibility
of its share price is targeted to be 93.72%, which is thrilling for all the investors. According to
the sensitivity diagram generated from the simulation, COGS, SG&A expense and sales growth
rate are three most important value drivers for the final enterprise value, which account for a
total 90.1% of change. So Nike should better cut their COGS and SG&A expense as a
percentage of sales in order to achieve a better future cash flow as well as a higher share value.
Additionally, from a broader view, Nike has announced plans to grow the NIKE Brand in all six
of its geographies including driving mid-single-digit growth through broader expansion in its
developed geographies (North America, Western Europe, and Japan), targeting an additional
$3.0-3.5 billion of annual revenue. Moreover, NIKE plans to invest aggressively in its
developing market geographies (Greater China, Central & Eastern Europe, and Emerging
Markets) targeting low double-digit growth and an additional $3.0-3.5 billion of annual revenue
(Parker, 2010). This news definitely facilitates our confidence in the increase of Nike’s future
share price.
7. Financial Modeling and Valuation Baozheng Ge
6
References
Business Overview. (n.d.). Retrieved April 28, 2016, from
http://www.nikeresponsibility.com/report/content/chapter/business-overview
Business Summary. (n.d.). Retrieved April 28, 2016, from
http://finance.yahoo.com/q/pr?s=NKE Profile
Competitors. (n.d.). Retrieved April 28, 2016, from
http://finance.yahoo.com/q/co?s=NKE Competitors
Mourdoukoutas, P. (2014, September 28). How Nike Wins. Retrieved April 28, 2016, from
http://www.forbes.com/sites/panosmourdoukoutas/2014/09/28/how-nike-
wins/#32452fff166e
Parker, M. (2010, May 04). NIKE, INC. INTRODUCES 2015 GLOBAL GROWTH
STRATEGY. Retrieved April 28, 2016, from
http://news.nike.com/news/nike-inc-introduces-2015-global-growth-strategy
Symington, S. (2014, September 08). 3 Reasons Nike, Inc.'s Stock Could Fall. Retrieved April
28, 2016, from
http://www.fool.com/investing/general/2014/09/08/3-reasons-nike-incs-stock-could-
fall.aspx
8. 2011 2012 2013 2014 2015
Sales/Revenue 20.89B 24.12B 25.33B 27.79B 30.7B
Cost of Goods Sold (COGS) incl. D&A 11.47B 13.62B 14.41B 15.34B 16.75B
COGS excluding D&A 11.12B 13.23B 13.95B 14.82B 16.15B
Depreciation & Amortization Expense 351M 395M 452M 518M 606M
Depreciation 335M 373M 438M 518M 606M
Amortization of Intangibles 16M 22M 14M - -
Gross Income 9.42B 10.5B 10.93B 12.44B 13.94B
2011 2012 2013 2014 2015
SG&A Expense 6.68B 7.41B 7.77B 8.77B 9.89B
Research & Development - - - - -
Other SG&A 6.68B 7.41B 7.77B 8.77B 9.89B
Other Operating Expense - - - - -
Unusual Expense (84M) (17M) (148M) 61M (615M)
EBIT after Unusual Expense 2.83B 3.11B 3.31B 3.62B 4.67B
Non Operating Income/Expense 29M (119M) (32M) (35M) (427M)
Non-Operating Interest Income 24M 30M 26M 5M 6M
Equity in Affiliates (Pretax) - - - - -
Interest Expense 34M 39M 28M 43M 39M
Gross Interest Expense 34M 39M 28M 43M 39M
Interest Capitalized - - - - -
Pretax Income 2.84B 2.98B 3.27B 3.54B 4.21B
Income Tax 711M 760M 808M 851M 932M
Income Tax - Current Domestic 346M 325M 503M 464M 676M
Income Tax - Current Foreign 441M 495M 398M 398M 369M
Income Tax - Deferred Domestic (61M) (50M) (3M) 5M (77M)
Income Tax - Deferred Foreign (15M) (10M) (90M) (16M) (36M)
Income Tax Credits - - - - -
Equity in Affiliates - - - - -
Other After Tax Income (Expense) - - - - -
Consolidated Net Income 2.13B 2.22B 2.46B 2.69B 3.27B
Minority Interest Expense - - - - -
Net Income 2.13B 2.22B 2.46B 2.69B 3.27B
Extraordinaries & Discontinued Operations - - 21M - -
Extra Items & Gain/Loss Sale Of Assets - - 231M - -
Cumulative Effect - Accounting Chg - - - - -
Discontinued Operations - - (210M) - -
Net Income After Extraordinaries 2.13B 2.22B 2.49B 2.69B 3.27B
Preferred Dividends - - - - -
Net Income Available to Common 2.13B 2.22B 2.25B 2.69B 3.27B
EPS (Basic) 1.12 1.21 1.26 1.53 1.9
Basic Shares Outstanding 1.9B 1.84B 1.79B 1.77B 1.72B
EPS (Diluted) 1.1 1.18 1.23 1.49 1.85
Diluted Shares Outstanding 1.94B 1.88B 1.83B 1.81B 1.77B
EBITDA 3.09B 3.49B 3.61B 4.2B 4.66B
Fiscal year is June-May. All values USD millions.
All the original data in income statement, balance sheet and
statement of cash flow is derived from
http://www.marketwatch.com/
