Description
1. Historical Performance Evaluation: Ratio Analysis – excel and explaination in word required 1-2
2. Proforma Income Statement – made in excel with assumption. Explain the whole assumption 1-2 page.
3. Calculate: Cost of Equity Capital
4. Cost of Debt Capital
5. Cost of preferred Equity Capital
6. Cost of other component in capital structure.
7. WACC (using above calculated components)
8. Company’s Stock Price, Intrinsic Value per share – excel file and explained in word as well. 1-2 page
Sample for both excel and theory is provided. Excel sample needs to be be mirrored. Dicounted Cash flow model is used for these questions
Unformatted Attachment Preview
Income Statement
Consolidated Statements of Income:
USD ($) shares in Millions, $ in Millions
(Figures rounded to nearest whole number)
1 Revenues
2 Cost of sales
Gross profit
3 Demand creation expense
4 Operating overhead expense
Total selling and administrative expense
Operating Income
5 Interest expense (income), net
6 Other (income) expense, net
Earnings before income taxes
7 Income tax expense (55.3%, 16.1%, 12.1%)
NET INCOME
DIVIDEND CALCULATIONS
8 Weighted average shares oustanding
Dividends Paid — common and preferred
9 Dividend per Share ($)
Discounted Dividend per share
Dividend Payout Ratio
Retention Ratio
Earnings per Common Share
Historical Financials: 12 Months Ended
May 31,
May 31,
May 31,
2018
2019
2020
$ 36,397
$ 39,117
$ 37,403
20,441
21,643
21,162
15,956
17,474
16,241
3,577
3,753
3,592
7,934
8,949
9,534
11,511
12,702
13,126
4,445
4,772
3,115
54
49
89
66
(78)
139
4,325
4,801
2,887
2,392
772
348
$ 1,933
$ 4,029
$ 2,539
1,624
1,243
0.78
64.3%
35.7%
$ 1.19
1,580
1,332
1,559
1,452
0.86
0.955
–
–
33.1%
66.9%
$ 2.55
57.2%
42.8%
$ 1.63
Assumptions:
1 Based on historical growth and the market rebounding since Q1 and Q2 of 2020, sales is projected to increase
2 Costs of goods sold has been steady over historical years and is assumed to remain constant at 56%
3 Based on historical spending on advertisments and endorcments, Nike’s expenses are assumed to be 9.7% of s
4 Operating overhead expenses will be slightly reduced in future years compared to its uptake in 2020, due to th
5 Following the 2020 fiscal year, Nike reports 9,406 million in debt with an average interest rate of 3.2% over the
6 The historical average of the past six years shows other income and expenses to net at an income of 0.14% of r
7 Nike reports their income tax expense as the effective rate taking into account federal tax rates and global sub
8 The number of outstanding shares is descreasing by 2% due to Nike’s repurchase program, shares are assumed
9 Dividend per share will grow at 11% based on historical trends and the market averages
10 Due to the Gordon Model assumtion that WACC should be greater than g, I am going to use the Terminal value
12 Months Ended
Consolidated Statements of Shareholders’ Equity
(Parenthetical) – $ / shares
May 31, 2020 May 31, 2019 May 31, 2018
Statement of Stockholders’ Equity [Abstract]
Dividends declared per common share (in dollars per share)
$ 0.955
$ 0.86
$ 0.78
Dividends declared per preferred share (in dollars per
share)
Earnings Per Share
Earnings Per Share [Abstract]
Earnings Per Share
$ 0.10
$ 0.10
$ 0.10
12 Months
Ended
May 31, 2020
NOTE 12 — EARNINGS PER SHARE The following is a reconc
diluted earnings per common share. The computations o
18
0.78
19
0.86
20
0.955
5/7/2020 quarterly
2/13/2020 quarterly
11/14/2019 quarterly
8/8/2019 quarterly
5/9/2019 quarterly
2/15/2019 quarterly
11/15/2018 quarterly
8/9/2018 quarterly
5/10/2018 quarterly
2/15/2018 quarterly
11/16/2017 quarterly
8/10/2017 quarterly
5/11/2017 quarterly
2/16/2017 quarterly
11/17/2016 quarterly
8/11/2016 quarterly
5/16/2016 quarterly
2/11/2016 quarterly
11/19/2015 quarterly
$0.245
$0.245
$0.245
$0.220
$0.22
$0.22
$0.22
$0.20
$0.20
$0.20
$0.20
$0.18
$0.18
$0.18
$0.18
$0.16
$0.16
$0.16
$0.32
1.11%
0.95%
1.07%
1.06%
1.06%
1.03%
1.18%
0.98%
1.18%
1.17%
1.35%
1.22%
1.33%
1.27%
1.41%
1.13%
1.12%
1.13%
0.96%
8/10/2015 quarterly
$0.28
0.98%
May 31,
2021
40,470
22,663
17,807
3,926
9,713
13,638
4,168
305
(57)
3,920
553
$ 3,367
Projected Financials: 12 Months Ending
May 31,
May 31,
May 31,
2022
2023
2024
43,789
47,379
51,264
24,522
26,532
28,708
19,267
20,847
22,556
4,247
4,596
4,973
10,509
11,371
12,303
14,757
15,967
17,276
4,510
4,880
5,280
301
285
285
(61)
(66)
(72)
4,271
4,661
5,067
602
657
714
$ 3,668
$ 4,004
$ 4,353
May 31,
2025
55,468
31,062
24,406
5,380
13,312
18,693
5,713
253
(78)
5,538
781
$ 4,757
D6
1525.1
1617
1.06
0.97
48.01%
52.0%
$ 2.21
1492.2
1756
1.18
0.99
47.86%
52.1%
$ 2.46
1460.0
1907
1.31
1.00
47.62%
52.4%
$ 2.74
1428.4
2071
1.45
1.02
47.58%
52.4%
$ 3.05
1397.6
2249
1.61
1.04
47.28%
52.7%
$ 3.40
1367.4
2442
1.79
Sum = 5.03
s projected to increase at 8.2% each year
stant at 56%
ssumed to be 9.7% of sales each year
ptake in 2020, due to the closure of stores, projected at 24% for future years
st rate of 3.2% over the next five years, with 500 million maturing in 2023 and 1,000 million maturing in 2025
an income of 0.14% of revenues, this is projected for the next five years
ax rates and global subtractions; the assumed effective tax rate is 14.1%, assuming federal tax rate continues at 21%
am, shares are assumed to decrease at 2.16% in line with historcal averages
use the Terminal value of Nike to determine the company’s intrinsic value
The following is a reconciliation from basic earnings per common share to
hare. The computations of diluted earnings per common share excluded
total payout Q payout avg yield average chg yield average change payout
$0.211
1.1346%
$0.955
$0.239
1.0475%
-1.432%
9.948%
$0.860
$0.215
1.0625%
-15.799%
9.302%
$0.780
$0.195
1.2304%
-4.440%
10.26%
$0.700
$0.175
1.2850%
18.482%
-31.43%
$0.920
$0.230
1.0475%
ROE
Retention Ratio
g
EBITDA
multiple
29.70%
42.8%
12.72%
4.234
32
TV
135.488
r
WACC
g
(10) TV
PV
9.38%
9.13%
12.72%
$ 133.06
$ 89.77
on maturing in 2025
l tax rate continues at 21%
-20
-0.0159744
-1.5974441
2018
2019
5.62%
56.16%
6.95%
55.33%
9.83%
21.80%
31.63%
9.59%
22.88%
32.47%
1.21%
0.18%
1.03%
-0.20%
55.31%
16.08%
div paid
div / share
-2.79%
6.68%
9.30%
div payout
-94.51%
eps
53.34%
2391.725
772.961
1624.369748
1579.7
1652.136752
1618.4
-9
-0.007240547
-0.724054706
-14.4188
2020 average
-4.58%
2.66%
56.58%
56.02%
interetst coverage
82.314815
9.60%
25.49%
35.09%
9.68%
23.39%
54
33.06%
0.6067416
2.86%
0.37%
1.70%
0.12%
12.05%
27.81%
-1.34%
8.26%
9.95%
-2.07%
7.47%
9.62%
42.19%
-26.16%
-56.59%
-1.62%
97.3877551
349.327
1558.8
-2.792% -1.341%
8.786% -17.988%
-2.07%
-4.60%
6.682%
8.264%
7.47%
-1.597%
-0.724%
-1.16%
9.302%
9.948%
9.62%
1591.6
35
$ 2,016
$ 1,698
2017
1657.8
$ (40)
1,623.8
$ (34)
1,579.7
$ (44)
-2.42%
-2.09%
-2.79%
1,558.8
$ (21)
-1.34%
-2.16%
3) Common Equity Capital: Rc.s.
r^s
Nike Market Price (Po)
Retention Rate
ROE
12.96%
135.52
42.8%
28.49%
(Nov. 26, 2020)
g
12.20%
D1
1.04
4) Cost of Debt Capital
Current Price of Bond
Coupon Payments Rate
Maturity Value of Bond
YTM
Company Tax Rate
4.83%
9,406
3.20%
10500
5.62
14.1%
4.82758
5) Cost of Preferred Equity Capital: r p.s.
Nike does not sell preferred stock
N/A
6) Other Component: Operating Lease
Operating Lease Liabilities
Tax Rate
Interest Rate
2.75%
3358
14.1%
3.20%
7) WACC
9.13%
(in millions) Weight
Common Stocks 16163.0
55.88%
Liabilities
9406.0
32.52%
Operating Lease Liabilities
3358.0
11.61%
Total Capital 28927.0
100.00%
Wc.s.
Wd
Wo.l
RrF
Nike Beta
Rm
7.24%
1.57%
0.32%
9.38%
0.02
0.82
0.11
CNBC, 5-yr average
https://markets.businessinsider.com/news/stocks/stock-market-outlook-sp500-rally-coronavirus
WACC
Cost of Equity
Cost of Debt
8.5
8.9
4.5
3.5 after tax
Consolidated Balance Sheets – USD ($) $ in Millions
Current assets:
Cash and equivalents
Short-term investments
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Operating lease right-of-use assets, net
Identifiable intangible assets, net
Goodwill
Deferred income taxes and other assets
TOTAL ASSETS
Current liabilities:
Current portion of long-term debt
Notes payable
Accounts payable
Current portion of operating lease liabilities
Accrued liabilities
Income taxes payable
Total current liabilities
Long-term debt
Operating lease liabilities
Deferred income taxes and other liabilities
Commitments and contingencies (Note 18)
Redeemable preferred stock
Shareholders’ equity:
Capital in excess of stated value
Accumulated other comprehensive income (loss)
Retained earnings (deficit)
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
May 31,
2020
May 31,
2019
$ 8,348
439
2,749
7,367
1,653
20,556
4,866
3,097
274
223
2,326
31,342
$ 4,466
197
4,272
5,622
1,968
16,525
4,744
0
283
154
2,011
23,717
3
248
2,248
445
5,184
156
8,284
9,406
2,913
2,684
6
9
2,612
0
5,010
229
7,866
3,464
0
3,347
0
0
8,299
(56)
(191)
8,055
31,342
7,163
231
1,643
9,040
23,717
Class A Convertible Common Stock
Shareholders’ equity:
Common stock at stated value
Class B Common Stock
Shareholders’ equity:
Common stock at stated value
0
0
$3
$3
Cost
Capital Structure Weight
Common Stocks
16,163
43.43%
Liabilities
21,051
56.57%
0.3
0.00%
37,214
100.00%
Operating Lease Liabilities
Total Capital
Ratio Analysis
Valuation
Price/Earnings (TTM)
Price/Cash Flow
Price/Sales (TTM)
Price/Book
Per Share
Dividend
Book Value
EPS (TTM)
Revenue
Profitability
EBITDA
Operating Margin
Profit Margin
Gross Profit Margin
Dividend
Dividend Yield
Payout Ratio
Annual Dividends (TTM)
Growth
Net Income
Earnings Per Share
Revenue
PEG (MRFY)
Financial Strength
Current Ratio (MRQ)
LT Debt to Equity (MRQ)
Total Debt to Capital (MRQ)
Return on Equity
Return on Assets
Return on Invested Capital
Assets
Asset Turnover
Assets per Employee
Inventory Turnover
NIKE
2020
Industry Averages
Consumer
Clothing & Discretionary
Footwear
Accessories
Sector
S&P
500
79.7
57.0
4.7
16.9
75.6
53.44
0.13
19.92
31.3
31.74
0.62
6.87
54.0
31.46
0.46
20.67
38.86
21.35
0.71
11.04
0.95
5.17
1.6
23.5
0.97
7.61
1.92
6.9
1.19
14.5
-1.31
5.5
1.87
48.24
9.65
30.97
2.43
50.28
194.62
17.2
$3.8B
8.3%
6.8%
43.4%
1.5B
7.7%
6.1%
45.2%
$7.0B
14.8%
5.5%
58.7%
$6.0B
4.3%
2.1%
35.9%
$8.8B
21.7%
16.9%
50.7%
1.035%
57.19%
0.98
0.75%
56.83
0.88
1.91%
6.74
1.33
1.51%
26.88
0.94
2.09%
35.58
1.81
-4.95%
4.03%
1.6
3.36%
26.93%
4.07%
N/A
-0.05%
0.96%
6.35%
N/A
12.21%
15.70%
17.63%
-1.45
13.28%
15.02%
8.89%
-0.64
2.48
161.77
53.87
28.63%
10.48%
17.37%
2.01
65.71
47.25
1.00%
15.06%
18.50%
1.66
73.66
31.34
1.00%
8.27%
12.10%
1.37
123.94
49.13
1.00%
7.68%
11.21%
1.81
126.14
45.32
1.00%
10.64%
16.86%
1.3
$384.8K
3.2
1.44
$381.8K
3.1
0.84
$603.6K
1.54
1.07
$1.5M
25.46
0.69
$2.7M
19.23
Data Retrieved from CNBC: Figures reported at end of fiscal year and TTM
III. Historical Performance Evaluation: Ratio Analysis
Table 1: Industry/Sector Ratio Analysis:
Although “there is no perfect way to determine a company’s financial health” or
sustainability, evaluating a company’s history and financial ratios helps investors and valuators
best predict and understand a business’s position within the market (Maverick, 2020). It is
important to consider ratio comparisons against individual competitors and the industry as a
whole. Company trends, strengths and weaknesses will be highlighted through the ratio
standardization process. I will analyze Nike by considering ratios from the markets in which they
compete in the consumer discretionary sector (CDS), the footwear industry and the clothing and
accessory (C&A) industry, shown within Table 1. Table 10, found in the Appendix, shows the
benchmark peer analysis. In my analysis tables, I have separated the different ratios to aid
understanding of where Nike excels as a business, and where some of Nike’s flaws are visible.
Within financial analysis it is important to standardize and evaluate a company’s five major
categories: liquidity, asset management, debt management, profitability, and market value
(Analysis of Financial Statements [AFS], 2017, Ch. 3). Starting by looking at a company’s liquidity,
we evaluate the two most popular liquidity ratios showing “the relationship between a firm’s cash
and other current assets to its current liabilities” (AFS, p. 1124). In general terms, liquidity ratios
are seen as the higher the better, meaning the company has the ability to pay off all current
liabilities, however, from a shareholder’s perspective, higher ratios could mean that money is tied
up in nonproductive assets, or high inventory holding. For Nike they report a current ratio, which
divides current assets by current liabilities, at 2.48. Their current ratio is higher than the footwear
industry (2.01), where most of revenues are generated, and significantly higher than the C&A
industry (1.66), and the CDS (1.37). Not only does Nike have a better ratio compared to the market
and industries, it is also better than all competing peers showing that they are better able to meet
the required payments of its current liabilities. With this, Table 10 shows Nike to have a 1.4 quick
ratio, matching ANTA Sports, and slightly below Lululemon who reports at 1.8 for their past
financial year. Overall, compared to the CDS, industries, and peer benchmarks, Nike proves to
hold a strong liquidity position. Next to be analyzed are asset management ratios, which are also
called efficiency ratios as they show “how effectively a firm is managing its assets” (AFS, p. 106).
Seen in Table 10 is Days. Sales Outstanding (DSO) compared to top competitors. Over the past
five years Nike’s average DSO was 36, matched by ANTA and only beaten by Lululemon. While it
seems Lulu’s DSO is better than that of Nike’s and the rest of the industry, it is partially due to the
store being considered a specialty, with a very targeted market while Nike and other brands
attract a bigger, broader customer base. The DSO average for the apparel and footwear industry
“is 98 days” (Dwyer, 2020). Given that Nike beats out most of the benchmarked peers and the
overall industry average, it can be said that Nike collects cash quicker and has a better credit policy
than others. Other important asset management ratios are asset turnover and fixed asset
turnover. Table 1 shows Nike’s asset turnover at 1.3, slightly lower and less efficient than the
footwear industry, however, this beats the C&A industry average and CDS. Looking at Nike’s
previous four years to 2020, each year had seen a slight rise and when comparing asset turnover
against peers, it shows remarkably similar ratio results, although marginally higher. Nike also
reports higher fixed asset ratios compared to two of its major competitors: Adidas and Under
Armor. These higher ratios imply that management is “utilizing its assets to generate revenues”
more effectively (Asset Managment Ratios, 2020). With better performing asset ratios, it is
understandable that Nike also performs better than its benchmark and industry competitors
when looking at inventory turnover. Largely, Nike outperforms its peers when looking at asset
management. ANTA and Lululemon are the top two performing competitors in terms of asset
management, which is important to understand as these are the growing brands within the
sporting market.
Following asset management, it is important to look at debt management and financial
leverage. Debt ratios vary significantly depending on the industry, but most people use debttoequity (D/E) as a good indicator for “long-term sustainability” as it measures debt against equity
and so is a measure of “investor interest and confidence in a company” (Maverick, What Is the
Best Measure of a Company’s Financial Health?, 2020). With lower D/E ratios showing companies
are being financed more by shareholders than creditors, a “downward trend overtime is an
indicator of increasingly solid financial ground” (Maverick, What Is the Best Measure of a
Company’s Financial Health?, 2020), however in recent years, this has not been the case for Nike.
Since 2015 Nike’s D/E ratio has been increasing, and although previously below 0.5, the most
recent fiscal year has seen it jump up to 1.62. In previous years and the prior 2020 four-year
average being 0.325, Nike’s assets were 32.5% funded by creditors and the remainder by
shareholders equity. Having assets funded via shareholders equity is typically better as a business
does not pay interest on these funds. Also, in comparison to industry averages, Nike’s D/E ratio
went from being 0.43 to 1.62, in years 2019 and 2020, respectively. The 2019 reported ratio beats
out the industry averages. Times Interest Earned (TIE, or the Interest Coverage ratio) is another
interesting ratio to look at in terms or debt management, as it “measures the extent to which
operating income can decline before the firm is unable to meets its annual interest costs” (AFS,
p. 112). TIE can be considered as the margin of safety for a company, and Nike reports a better
2019 financial statement than all competing peers at 36.4x, with the closest competitor being
ANTA at 31.1x. While evaluating these debt management ratios, I have been looking at years prior
to 2020 as well as the 2020 financial year. Due to Nike’s fiscal year ending in May, their 2020
report and ratios have been impacted by the Covid-19 pandemic, unlike rival companies. As an
investor or valuator, we have the opportunity for a unique look at how the pandemic has and can
continue to impact the finances of Nike and what is most likely in store for competitors.
After looking at the combined impacts of liquidity, asset management, and debt
management, next is the profitability of a company. The income statement portrays many of the
profitability ratios, the first being the gross profit margin which shows profit per dollar before any
expenses – 10 – other than COGs are deducted. For Nike, their gross profit margin for the 2020
fiscal year was 43%, and similar to its five-year average. However, when comparing this to the
footwear and C&A industries and many of Nike’s direct peers, they underperform. That said, Nike
does beat the overall CDS. The next ratio portrayed through the income statement is the
operating profit margin, where figures seem to turn around for Nike. In comparing an operating
margin of 12% over the past five years, we see four of the six rival businesses being below 10%,
although Lululemon and ANTA Sports still perform better. Finally, directly from the income
statement is the Net Income / overall Profit Margin, showing the overall profit per dollar of sales.
Here, Nike averaged 9.3% beating the same competitors as the operating profit margin and in
2020, 6.8% profit margin outperforms the industry averages and CDS. With this the same story
remains true for the Basic Earning Power ratio, which shows the earning power of assets before
taxes and leverages. This is interesting to consider when looking at ANTA competing in a different
market, this being China, and Lululemon competing in the U.S
Beyond the above appraising profitability ratios, for a shareholder it is important to look
at the three return-on- ratios: ROA, ROE, and ROIC. All three ratios increased from 2018 to 2019
but then declined in 2020. With gross margin being consistent over the years, we can conclude
the 2019 increase was due to a 108% increase in net income from $1.93B to $4.03B, but then
sales declined by 37% in 2020 to 2.54B, due to the initial pandemic outbreak. In 2020 ROA was
below the footwear industry average but above the C&A industry and CDS, suggesting that Nike
benefits from the large revenues from its footwear lines. In 2019 Nike earned an ROA of 17.4%,
below Lululemon at 24.1%, but above all other competitors. Over the past five years, even with
the effects of Covid-19 in early 2020, Nike outperformed all top competitors. Return on Invested
Capital took a large dip from 26.6% in 2019 to 13.6% in 2020, however its average of 21.7% over
five years is very competitive compared to its rivals and industry averages.
Finally, when concluding a company’s ratio analysis, it is important to look at market value
ratios, in measuring “the value of a company’s stock” (AFS, p. 116), as this helps investors
understand and evaluate the value of the company, and allow comparison against competitors
and industry averages. Price/Earnings ratio calculates how much an investor is willing to per dollar
of reported profits, for Nike in 2020, 35.5x. This being less than half of the footwear industry
average, however slightly above C&A. With this, their five-year average at 34.9x is competitive
with rival brands, besting Adidas, ANTA Sports and Asics. Having a higher P/E ratio portrays a firm
with strong growth prospects, as it measures “its current share price relative to its earnings per
share” (Fernando, 2020). Not only do investors and valuators compare against competitors, but
they look at historical earnings to help understand the current direction and trend of the business.
Interesting to note, in 2018 Nike’s P/E ratio spiked from 21x to 64x, then falling to 29x in 2019.
P/E is an imperative ratio as it can show a stock being over- or under-valued relative to stock price
and earnings. It would seem with Under Armour’s weak ratio standing, that their stock is
overvalued with a P/E ratio of 82.4x in 2019. Another market value ratio is Price/Cash Flow as
stock prices depend on a company’s ability to generate cash flows. Nike TTM P/CF performs well
and is above all industry averages and their fiscal year end beats out all industry peers expect
Lululemon. Nike’s investors are willing to pay 34x for every dollar of cash flow. The above average
ratio suggests good growth prospects and that risk is below average, suggesting a good
investment. All in all, the ratios portray Nike to have a strong trending history, while competing
well against both bench-marketed peers, and industry averages. Nike outperforms industry peers
across many platforms but sees the most competition from Lululemon and ANTA Sports, these
being top competitors that Nike will need to be aware of going forward.
IV. Forecast Stock Value: Valuation Methodology
Income Statement Explained
Assumptions:
• (1) Future expected sales: Historically Nike has grown around the 5.5% mark each year,
until the most recent 2020 fiscal year, where revenues declined by 4.58% due to impacts of
Covid19 and the negative effects this has had on overall economy. Since the fiscal year ending
May 31, 2020, Nike has already bounced back, seeing strong increases in growth. Top financial
industry outlets are projecting Nike’s sales growth to increase substantially to around 12% in
future years (Yahoo! Finance, 2020). Combining this information with historical data retrieved,
my assumption is that Nike’s revenues will grow at a constant rate of 8.2% over the next five
years.
• (2) Percentage of Cost of Goods Sold: Over the past three years Nike’s COGs have
remained constant (within a 1.5% margin), and so it is assumed this trend will continue for the
next five years with costs being 56% of sales.
• (3) Demand Creation Expense: Consisting of advertising and promotional costs (largely
due to endorsement contracts) this has remained reasonably constant over the past three years
and averaged 9.68% of Nike’s sales. Assuming this shall continue for the next five years, demand
creation expense is projected at 9.7% of sales.
• (4) Operating Overhead Expense: Over the past three years overhead expenses have
averaged at 23.4%, however over the past six years the average is slightly less and more consistent
at 22.5%. The slight increase in the historical averages is impacted by the most recent year of
operating expenses increasing due to “higher wage-related expenses” from digital capability
investment and “higher bad debt expense” (Nike, INC: Annual 10-K, 2020). Taking into account
both the closure of Nike’s retail outlets (reduction in employee wages) along with the increase in
wage expenses for digital campaigns, it is projected that Nike’s operating overhead expense will
be 24% of revenues.
• (5) Interest Payments based on Certain Interest Rate: According to Notes 7 and 8
published in the Nike 2020 10-K, Nike has 248 million in short term debt with an interest rate of
1.65% and a further 9,406 million in long term debt. 1,503 million of the long-term debt is
scheduled for maturity within the next five years: “the years ending May 2021, through 2025 are
$3 million, $0 million, $500 million, $0 million and $1,000 million, respectively, at face value”
(Nike, INC: Annual 10-K, 2020), with an average interest rate of 3.2%. These figures have been
portrayed in the projected income statement assuming no additional debt is added.
• (6) Other (Income) Expenses, net: The 10-K specifies other incomes and expenses
“comprises foreign currency conversion gains and losses from re-measurement, the impact of
certain foreign currency derivative instruments, as well as unusual non-operating transactions
outside the normal course of business” (Nike, INC: Annual 10-K, 2020). This important to note as
in the past fiscal year Nike paid a non-recurring impairment charge of $405 million due to a
planned partnership transition. Due to this charge and non-recurring impact, I had averaged the
past six years to make an assumption about the future, calculating 0.14% of revenues.
• (7) Income Tax Expense: Due to Nike being a global corporation, here the effective
income tax expense is calculated and used to determine overall net income. The federal corporate
tax rate is predicted to continue at 21% since its reduction in January 2018 from 35%. With this
new tax rate, the average effective income tax expense over the past two years has been 14.1%
and assumed to continue at this rate.
• (8) Weighted Average Shares Outstanding: To calculate dividends Nike uses the
weighted average of outstanding shares, and as of 2020 Nike has 1559 outstanding. The average
– 12 – outstanding shares are expected to decrease at a constant rate of 2.16% due to historical
averages of a reduction in Nike’s shares and their current repurchase program.
• (9) Dividend per Share: Nike dividend growth rate reduced four years in a row, from
16.7% in 2015 to 10% in 2019, followed by a small increase to 11.4% in 2020. Over the past five
years, dividend growth has averaged 11.9% and with these growth patterns, it is expected that
Nike’s dividends will grow at a rate of 11% into the future.
• (10) Intrinsic value: Due to Nike’s WACC being smaller than the growth rate, the terminal
value (TV) was required to calculate the intrinsic value as the Gordon Model was unsuitable.
Analyze / Compare Intrinsic Value:
Intrinsic Value (IV): $89.77
Actual Market Value (MV): $135.52
Book Value (BV): $22.92
It is important to calculate the intrinsic value of a company’s stock as this provides “an
estimate of the actual value of the company, separate from how the market values it” (Maverick,
2020). This ‘actual’ (true) value is then used by investors to determine whether the business’s
stock is over- or under- valued. If the stock is seen to be undervalued, knowledgeable investors
would consider investing in the company and purchasing stock, or contrary to this if stock is
overvalued. As per my calculations, Nike’s intrinsic value is $89.77. To determine whether a
company is over or under-valued an investor or valuator will compare against both the market
and book value. The – 14 – market value of a company is typically higher than the book value as it
“captures profitability, intangibles, and future growth prospects” whereas the book value is the
“net value of a firm’s assets found on its balance sheet” also known as shareholders equity (Seth,
2020).
Given that the book value is usually below the market value, it is unsurprising that the
book value per share for Nike at $22.92 is also below its intrinsic value. This value tells
shareholders how much they would receive in the event of liquidation. However, this is extremely
unlikely as the intrinsic value is almost 4x the book value due to its performance and growth
prospects. It is said that “you shouldn’t judge a book by its cover, and you shouldn’t judge a
company by the cover it puts on its book value” as older and larger corporations have the potential
to have hidden values (Beattie, 2020). Part of the lower book value for Nike may well be a feature
of their nonfactory ownership strategy, such that they do not have the property as an asset on
the balance sheet. In this case, I believe Nike’s low book value does not represent the true value
of the company.
In contrast to the book value, Nike’s current market value of $135.52 per share is also
above the intrinsic value. With both the intrinsic value and market value accounting for
profitability growth rates and intangibles, it makes sense when comparing these two figures that
they are closer together, with the market value being at 1.5x the intrinsic value. However, there
can be difficulty in calculating a company’s intrinsic value due to the need to account for intangible
assets as “estimates of the true value vary greatly between analysts” (Maverick, 2020). The
market value is partly reliant on public sentiment, and for Nike with billions of customers
worldwide and a strong brand image their MV is increased. Being a company with a highly skilled
management team, investment decisions are thoroughly considered and designed to enable
growth and product innovation. In turn, this helps them push for a high market value and
eagerness by investors to participate in the company’s future.
As it stands, Nike’s stock sees the actual market price 491% above the book value and
51% above the intrinsic value and is overvalued. Therefore, investors are likely to sell while the
price is high. With Nike already being the largest sportswear supplier to the markets worldwide,
it is somewhat harder for them to grow in comparison to their newer competitors. Though it may
be harder for Nike’s value to increase and grow, undoubtedly their senior management team will
continue to make decisions to aid company development, and in turn their market value. A
current example of how the company is supporting equity value is via the share buyback program,
which will increase dividends due to a decreased number in outstanding shares
All in all, Nike is still a highly demanded stock within the market, one where investors see
a growing worldwide customer base as further evidence for investing into Nike’s stock. With the
onset of Covid-19 early in 2020, Nike’s stock saw a fall to its lowest market price since April 2018.
However, since this decline, Nike’s stock has rebounded and grown to an all-time high ($136) with
the athleisure industry boom, a subsequent response to the pandemic. Additionally, the growing
trend amongst women within the sports industry and the push for health and wellness overall has
created a lifestyle culture of fitness. As such, Nike and its competitors have a huge opportunity to
take advantage of this boom and increase market share according. With new consumers, the
overall market has developed leaving some of Nike’s competitors falling behind (e.g., Under
Armour) and up-and-coming brands prospering (e.g., Lululemon, see Figure 5).
My company analysis and historical evaluation portrays the strength of Nike. They have
been and still are a top performer in this competitive industry. However, as an investor, I would
not buy Nike, Inc. stock at this time due to the imbalance between its intrinsic value and market
value, which is overpriced.
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