Is running with Nike a good investment?
Opdateret: aug. 22
Nike is one of the most well-known brands in the world. However, just because it has a strong brand, it doesn't necessarily mean that it is a good investment. In this analysis I will give my opinion on Nike.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that I do not own any shares in Nike. I have previously owned shares in Adidas and Skechers is on my watch list. It doesn't mean I do not like Nike, and as always, my analysis will be objective.
I believe that most people know Nike. It is a multinational corporation that is mostly known for their footwear and apparel. The company was founded in 1965 as Blue Ribbon Sports and changed its name to Nike in 1971. Nike has acquired several other companies, the most well-known being Hurley International and Converse. Nike is one of the most well-known brands in the world. Not only the name but also the Swoosh logo, which most people known. Hence, it is safe to say that Nike has a very strong brand moat.
Their CEO is John Donahue. He has only been the CEO since January 2020. Prior to becoming CEO of Nike, he served at Nike's Board of Directors since 2014. He has also been the CEO for ServiceNow and eBay, while he also serves as Chairman of the Board at PayPal. He has an MBA from Stanford Graduate School of Business and a bachelor's degree in economics from Dartmouth College. It is difficult to judge John Donahue after such a short tenure as CEO, but he certainly has the credentials in place. In my opinion, there are some good reasons for Nike to pick John Donahue as a CEO beside his credentials. E-commerce will be a priority for Nike in the future to boost their profits, and there is hardly a better leader than one that has been the CEO of eBay in the past. Another reason that John Donahue is a good pick is that Nike still suffers from the sexual harassment scandal from 2018, and John Donahue is credited for doing a lot to advance women to leadership roles at eBay through the Women's Initiative Network, which could improve Nike's reputation in the future.
We have determined that Nike has a brand moat. While it is too early to say if management is good, I believe that the impressive credentials will be good for Nike. Now let us investigate the big five numbers to see if Nike does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. These numbers are fantastic. Nike has continuously delivered a ROIC of more than 22 % over a ten-year period. Not many companies deliver numbers like these, meaning that these numbers should get you excited if you consider investing in Nike.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Looking at the numbers from Nike, they are a bit underwhelming. They had a great year last year, but it is too early to say if the trend has changed. The numbers are by no means disastrous, but they still leave something to desire.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. It is a bit of a mixed bag. We have fine numbers in the older benchmarks, while the latest benchmarks have been fantastic. I usually don't give too much importance to the one-year benchmark, but it is certainly an outlier that is difficult to sustain.
The Equity Growth Rate is also known as the most important of the four growth rates. Once again, we see numbers just below the requirements on the older benchmarks, while the later benchmarks have been great. As in the growth rates, we see an outlier in the one-year benchmark, which will be hard to sustain in the long run. Hence, I see no reason to give it much importance.
Finally, we investigate the Cash Growth Rates. In the first four benchmarks you see solid numbers all above the 10 % requirement we have. Once again, the last year is an outlier, and while numbers like these are fantastic, you cannot expect numbers like these frequently. All in all, you can be happy with the cash growth rate if you are invested in Nike.
To shortly summarize the five numbers from Nike. ROIC will always be the most important number and Nike has a fantastic ROIC in all the benchmarks. If you can find a company that consistently deliver a ROIC of more than 20 %, you should certainly be interested. Overall, the four growth rates all have the same pattern with the last year being an outlier. If we leave out the last benchmark for all growth rates, we see the EPS growth rate, the equity growth rate and the cash growth rate all reaching or being very close to reaching the requirements in all benchmarks. While the sales growth rate has been a bit underwhelming. All in all, I would feel comfortable investing in Nike based on the numbers.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation in Nike, I can see that Nike has 1,64 years earnings in debt, which is acceptable.
Based on the moat and the numbers, I believe that Nike is an interesting company but like with all other investments, there are some risks. One of the risks is competition. The athletic footwear and apparel industry is highly competitive worldwide, and trends change fast. However, it is where their strong brand moat will come in handy. Another risk is deterioration in the economic conditions worldwide. It would reduce consumer demand for Nike's products, as consumers would probably reduce the amount of money, they will use on leisure wear. While nothing currently implies that we will see a deterioration in economic conditions, we also need to be aware that we are still having a pandemic despite it starting to look better. The pandemic could still course sporting events to be cancelled, which would reduce consumers spending on Nike's products. There are more risks concerning Nike, and you will be able to find a whole lot of these if you read their annual report.
On the other hand, if you believe that the pandemic is soon over, it could be another catalyst for Nike. The other day JPMorgan announced that they believe that back-to-school and back-to-work spending could be positive for companies such as Nike. Besides that, you would probably need to give Nike the benefits of the doubt, as they have been able to continuously deliver a great ROIC, and Nike have in the last 5 years outperformed the S&P 500, as $100 invested in Nike in 2016 would have turned into approximately $250, while it would approximately be $218, if you had invested in the S&P 500.
All right, we have gone through the numbers, potential and risk regarding Nike, and now it is time for us to calculate a price for Nike. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use a EPS at 2.75 (which is a bit lower than the current one at 3.62). I chose an Estimated future EPS growth rate of 10,1 (which is the expected growth rate at Finbox), Estimated future PE 20,2 (which is the double of growth rate, as the historical highest PE is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $35,94, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Nike at price of $17,97 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 6.657. The Capital Expenditures was 695. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 486,5 in our further calculations. The Tax Provision was 934. We have 1.280 outstanding shares. Hence, the calculation will be like this: (6.657 - 486,5 + 934) / 1.280 x 10 = $55,5 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 2,69 and a growth rate of 10,1 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $33,99.
I believe that Nike is a great company with a huge brand moat. While there are risks, I find them to be in a relative small scale. While I would like to open a position in Nike at my highest calculated buy price, which is the TEN CAP price at $55,5, I also must admit that it doesn't seem realistic that it will happen. Meaning that I will probably never be an owner of Nike. Luckily, there are many other interesting companies out there.
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