Nike Inc is a public traded company dealing with clothing, footwear, and an equipment supplier in the State of Oregon United States. Being the dominant player of the athletic footwear and sporting apparel business in the World Nike operating income was $ 2.81 billion in 2011 on revenues totaling $20.9 billion. Nike stock price is extremely volatile has rebounded three times over the period of 2010/ 2012, therefore a potential stock to invest both for the short and long term.
Valuation
Valuation is a key components and a critical metrics that investors look at when considering on what company to invest in. Moreover, capital earning in growth is a major contributor to the overall appreciation in both the share price and the total dividends earnings. Moreover, valuation also plays role on both the return and the risk than one wish to achieve by investing in a particular stock. Therefore, the risk is higher when the potential yields are lower and valuations are high. This forms the very first principle of investing success: buy low, sell high.
Historical Valuation of the Stock
Nike at the beginning of year 2000 the share price was highly valued. On 12/31/1999 Nike’s share price was $24. 81and the PE ratio was below 23. Consequently, price had been considerably over and above earnings growth of 13. 9% which was above the normal PE ration of 19:1.
Valuation of Nike
The discount cash flow model shows that Nike’s shares are between $75 and $124 each. While the fair value which is basically derived from historical volatility of valuation indicators reveals that the fair value of the stock is $98 each representing PE ratio of 22. The future annual compounded growth rate of Nike in the next 5 years was estimated to be 8 %, which was much higher than the company’s historical growth rate of 3.8%. One the other hand, the operating margins are projected to be between 14% and 15 % which is modestly above the 3 years trailing average. Beyond 5 years, it’s projected that the free cash of Nike was at 3.4 % for the next 15 years with an assumption that the weighted average cost of capital (WACC) was 9.8 % to calculating the free cash flow.
Target Price
Currently, Nike share price in trading is at 110.66, therefore in determining the best target price would be at least $10 below the current price that would be $100. Since the valuation indicators showed that the stock had a fair value of $ 98 which is $2 above our presumed target price.
Risks to Your Price Target
Our discounted cash flow model values Nike based on the present value of all future free cash flow. Even though we are able to determine the fair value to be $ 98, every stock has some degree of uncertainty of its valuation drives for instance the sales and revenues. Consequently, if the future of certainly it would be true that companies would subsequently trade at their fair values and market volatility wouldn’t be there. The possible risk of the given target price are:
Possible total loss of the investment and are the shares really worth how much i am buying them for?
The probability of the fair value < 0 responds the question of the possibility of total loss which was estimated to be less than 0.1% in the case of Nike which is almost improbable. The probability is that the fair value is twice the current share price, therefore, investors can buy the share at a price which they can easily recoup their initial investment.
NKE Technical Analysis
Short Term Analysis
| Indicator | Last | Change | Sentiment* |
| 20-day Moving Average | 109.33 | 0.14 (0.13%) | Bullish |
| 50-day Moving Average | 108.82 | 0.08 (0.08%) | Bullish |
| MACD (12,26) | 0.41 | 0.19 (85.62%) | MACD sentiment is Bullish |
| MACD Signal | -0.11 | 0.06 (-35.11%) | |
| MACD Histogram | 0.52 | 0.13 (33.49%) | |
| 50-day Raw Stochastic | 71.91 | 66.92 | Bullish |
| Stochastic s%K(50) | 64.87 | ||
| Stochastic s%D(50) | 54.62 |
Long-Term NIKE (NKE) Technical Analysis
| Indicator | Last | Change | Sentiment* |
| 130-day Moving Average | 101.90 | 0.14 (0.14%) | Bullish |
| 260-day Moving Average | 93.77 | 0.12 (0.13%) | Bullish |
| MACD (50,130) | 7.19 | -0.14 (-1.84%) | MACD sentiment is Bearish |
| MACD Signal Line | 19.54 | 7.19 (58.23%) | |
| MACD Histogram | -12.35 | -7.33 (145.85%) | |
| 130-day Raw Stochastic | 89.99 | 1.29 | Strongly Bullish |
| Stochastic s %K(130) | 87.20 | ||
| Stochastic s %D(130) | 83.29 |
Defined in the range of between minus 12 which forms the bearish extreme to the plus 12 which represents the bullish extreme the NIKE(NKE). The (NKE) sentiment could be Bearish, Bearish extreme, Bearish strong or Bullish, Bullish strong or Bullish extreme. The bullish sentiment represents a buying signal while a bearish sentiment represents a selling signal. However, Nike’s combination of extremely bullish/bearish sentiment could be considered as a sign of either overbought/oversold condition.
Investment Risks
- Industry Risks
At the moment Nike faces stiff competition from its competitors, the biggest of them in the form of the recent merger between Adidas and Reebok in January 2006. The net result of this move by the competitors has been continued decreasing market share especially in the United States. With Adidas now in charge of the market share in the United States, Nike is currently faced with the challenge of holding on to its stature as the industry leader which is seriously under threat. As it is, Nike is facing an uphill climb in its efforts to maintain the loyalty of its customers who are increasingly being attracted to brands of such big rivals such as Adidas and New Balance. There is no doubt that it will be extremely difficult for Nike to maintain, attract and gain new customers in the rapidly expanding its market share (Nike Inc., 2010).
Nike also faces industry risk in the form of the rapid change in technology which has effectively put pressure on Nike to become innovative. This is especially the case because advances in technology in the athletic apparel as well as footwear go a long way to assist a brand gain and maintain its new customers. This makes it imperative for Nike’s research and development to strive to keep up with the new trend if the company is to escape the risks of losing its brand image together with its big sales volume.
- Credit Risks
It is feared that the credit risks of Nike Inc. are bound to increase if there is consolidation of retailers or even concentration of the retail market share itself among a handful of retailers. This has got negative impact to the company in the sense that it impairs Nike’s ability to sell its products thus compromising its profitability. The increased market share of competitors who have acquired and constructed additional stores has concentrated the credit risk of Nike with a relatively modest number of retailers (Nike Inc., 2010).. Furthermore, if any of the retailers happen to experience a shortage of liquidity, it would result in increased that may not be able to settle their outstanding payables to Nike. Finally, Nike faces the credit threat of not being able to find other sufficient retail outlets for her products so as to sustain the same amount of sales and revenues where the market share is concentrated among a single or few retailers in a given country or region.
- Exchange rate risk
Nike as multinational is at great exchange rate risk owing to the fact that it conducts its transactions in a number of currencies. This means that Nike is greatly exposed to fluctuations in the foreign currency exchange rates in relation to the U.S. dollar (Nike Inc., 2010). Unchecked volatility in both domestic and international markets along with the exchange rated as well as contracts in foreign currencies often have a negative bearing on the company’s reported results and status
- Market risks
Nike Company is at present greatly subject to global market risks such the negative effects of fluctuations in the foreign currency exchange rates together with interest rates. Nike employs derivatives to control financial exposures that happen in the normal operation of business but does not issues derivatives for the purpose of speculative trading (Nike Inc., 2010).
- Political risks
Nike as an international company is faced with immense political risks. The first political risk is change of government in any of the countries that Nike is established. Changes of guard in mature democracies are relatively easier to foresee and plan for. The change could affect the company when there is resultant review of policies pertaining to conducting business.
The other more serious political risk that Nike faces in countries it operates from is violent conflicts that are damaging to trade (Nike Inc., 2010). These are both in terms of internal and external conflicts including terrorist activities are very difficult to prepare for in advance. Other global threats that the company has to contend with include anti-glottalization movements, poverty, environmental concerns, and cyder attacks.
References:
Nike Inc. (2010). NIKE, INC. ANNUAL REPORT ON FORM 10−K. Retrieved on April 27, 2012 from: http://media.corporate-ir.net/media_files/IROL/10/100529/nike-ar-20100804/docs/NIKE_2010_10-K.pdf.
