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Nike: Does a strong brand equate to a sound investment?

Opdateret: 14. jun.


Nike is one of the most well-known brands in the world. It is consistently being mentioned as one of the 100 most well-known and valuable brands in the world. However, just because a company has a strong brand, it doesn't necessarily mean that it is a good investment. In this analysis, I will provide my opinion on Nike as an investment.


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 at the time of writing this post, I do not own shares in Nike. I do however own shares in Crocs, which is somewhat a competitor. Currently Crocs is 3,96 % of my portfolio. If you would like to see or copy my portfolio, you can see how to do so here. As I don't own shares in Nike or any of their direct competitors. If you want to buy shares in Nike or Crocs, you can do so at eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.



I believe that most people are familiar with Nike. It is a multinational corporation that is mostly known for its 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 primarily sells footwear, which accounted for 68% of its revenue in fiscal 2023, and apparel, which accounted for 28% of its revenue in the same period. Their products are sold through wholesale (56%) or Nike Direct (44%), which includes Nike-owned retail stores or online. Their largest market is North America, which contributed 44% to their revenue in fiscal year 2023. Nike is one of the most well-known brands in the world. Not only the name, but also the Swoosh logo, which most people know. Hence, it is safe to say that Nike has a very strong brand moat.

Their CEO is John Donahoe. He has only been the CEO since January 2020. Prior to becoming CEO of Nike, he served on Nike's Board of Directors since 2014. He has also served as the CEO for ServiceNow and eBay, and currently holds the position of 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 Donahoe after such a short tenure as CEO, but he certainly has the necessary credentials. In my opinion, there are several compelling reasons for Nike to choose John Donahoe as their CEO, in addition to 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 someone who has previously served as the CEO of eBay. Another reason why John Donahoe is a good choice is that Nike is still dealing with the aftermath of a sexual harassment scandal in 2018. John Donahoe is recognized for his efforts in promoting women to leadership positions at eBay through the Women's Initiative Network. This could potentially enhance Nike's reputation in the long run. I believe that John Donahoe is the right person to lead Nike moving forward.


I believe that Nike has a strong brand moat. I also believe that the management is good, as the CEO's impressive credentials will be beneficial for Nike. Now, let us investigate the numbers to determine if Nike does indeed meet our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number we investigate is the return on invested capital, also known as ROIC. We require a 10-year history, and we anticipate that all the figures will exceed 10%. Nike has consistently delivered impressive financial performance over the past decade, with its return on invested capital (ROIC) never falling below 10% and only dipping below 15% on two occasions. One of the years when ROIC was below 15% was in 2020, when lockdowns had an impact on companies like Nike. Not many companies have delivered a return on invested capital (ROIC) like Nike, and seeing these numbers is very encouraging.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. There have been some bumps along the road, and it is not surprising to see that equity dropped to record lows during the pandemic. While the numbers before the pandemic were slightly concerning, it is reassuring to see that Nike has achieved record numbers after the pandemic. The equity dropped slightly in 2023, which is natural due to the macroeconomic environment, and is not something that concerns me.



Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Not surprisingly, Nike has consistently generated positive free cash flow every year. The free cash flow has grown steadily from 2018 to 2021, with the exception of the lockdown year in 2020. The free cash flow hasn't reached the levels of 2021 again, but this is not too concerning as fiscal 2021 was impacted by Government stimulus in the U.S. It is encouraging to see that free cash flow increased in 2023, and is now at a higher level than it was pre-pandemic. Levered free cash flow margin has been acceptable in the last couple of years, while the free cash flow yield is the highest it has been since 2019 and the third highest in the last 10 years. It indicates that Nike may be trading at a lower valuation than usual, but we will discuss this further in the analysis.



Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by current earnings. Doing the calculation on Nike, I can see that Nike has 1,76 years of earnings in debt, which is acceptable.



Based on the market analysis and financial data, I believe that Nike is an intriguing company. However, like any other investment, there are inherent risks involved if you are considering investing in Nike. Worsening global economic conditions. Nike mentions that the potential deterioration of the economic market could affect its performance moving forward. Nike's sales are impacted by consumers' discretionary spending, and historical data shows that declines in consumer spending have previously led to a decrease in demand for Nike's products. Lower demand would result in decreased revenue, increased discounts, and reduced margins. With a recession looming, it could have an impact on Nike for years to come. Competition. In its annual report, Nike describes the footwear and apparel industry as highly competitive on a global scale. The intense competition and rapid changes in technology and consumer preferences in the markets, as Nike describes it, constitute significant risk factors in their operations. A few contract manufacturers supply a significant portion of the footwear. According to the annual report, four footwear contractors accounted for approximately 58% of the company's footwear production. The reason it is risky is that it could lead to a situation similar to what Nike experienced last year, with a large amount of inventory. In 2021, Nike faced factory lockdowns in Vietnam and Indonesia. To compensate for this, Nike placed substantial orders for inventory in 2022. As a result, inventory grew by 65% compared to the previous year. If inventory levels are high, some of the inventory will need to be sold at a discount, which hurts margins.


There is also plenty of potential for Nike moving forward. Expanding Nike Direct. Nike is experiencing year-over-year growth in Nike Direct. Last fiscal year, Nike Direct experienced a growth of 18% compared to the previous year, with a 14% increase in Nike Digital and a 24% increase in Nike Stores. Management expects continued growth in Nike Direct, which will result in higher margins and increased profitability along the way. Innovation. In his letters to shareholders, CEO John Donahoe always mentions the importance of the culture innovation at Nike, as this culture is what will fuel growth moving forward. Some of these innovations are Dri-FIT, Infinalon, FlyeEase and Nike Forward that are all examples of the innovative culture at Nike. John Donahoe believes that Nike's relentless pipeline of innovative products creates and expands the seperation between Nike and their competitors. Strong brands. As previously mentioned, Nike has a strong brand moat, which has been long-lasting. In his letter to shareholders, CEO John Donahoe mentioned that Nike's global portfolio is a significant competitive advantage. He mentioned that brands like Nike, Jordan, and Converse are three of the most globally connected brands across diverse markets. These brands continue to create deeper and more direct relationships with consumers. I agree, and it is unlikely that any of these brands will go out of fashion anytime soon. Hence, these brands alone could make Nike a good investment.



Now it is time to calculate the price of Nike shares. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,23, which is from 2022. I have selected a projected future EPS growth rate of 15% (Finbox estimates that EPS will grow by 15%). Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Nike has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $96,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Nike at a price of $48,45 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 5.841. Capital expenditures were 969. I attempted to review their annual report in order to ascertain the proportion of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 678 in our calculations. The tax provision was 1.131. We have 1.532 outstanding shares. Hence, the calculation will be as follows: (5.841– 678 + 1.131) / 1.532 x 10 = $41,08 in Ten Cap price.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Nike's Free Cash Flow Per Share at $3,17 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $50,04.


I believe that Nike is a great company with a strong brand moat. I believe that management is good as well. Nike is facing some risks when it comes to the global economy, which could affect consumer spending. I also hope that management will learn from their mistake and not ramp up inventory as they did last year. Nonetheless, Nike is a company with timeless brands that will continue to sell. They are an innovative company, and will continue to present new innovative products, which should expand the separation between Nike and other brands. I also like that Nike is expanding their direct sales, as it should increase margins and lead to higher profitability moving forward. Nike is a quality company, which is exemplified by their high return on invested capital. Quality companies rarely trade on large discounts, and Warren Buffett once said that it is better to buy a wonderful company at a fair price than a fair company at a wonderful price. Nonetheless, I would still need a margin of safety because of the risks mentioned in the analysis. Thus, I will consider buying Nike stocks if they reach $77, which would give me a 20% discount on the Margin of Safety price.


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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


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