I'm always seeking to perfect the holdings in my long-term portfolio, which is much different than my "trading" portfolio. In my trading portfolio, I'm geared more towards short-term moves and am okay with certain risks. However, with my long-term portfolio, I am constantly seeking to be properly invested. Buy-and-hold doesn't apply to the markets the way it once did. Now it's more of a buy-hold-rotate-and-reallocate strategy. I focus on core holdings and growth stocks, while using ETF's to diversify my holdings.
Nike (NKE) has been a stock I've had my eye on lately. Nike is a brand I use and love. Whether it's sweatpants, hoodies or running shoes, I love the design and quality that comes with them. Just like all the other stocks I am already long, I will put Nike to the test to see if it fits my investment goals. If it doesn't fit my investment outline, it does not mean it necessarily is a bad investment. In fact, my thoughts going into the analysis are that Nike is a perfectly fine investment, although it may not fit my preferences. In this article I will attempt to break down many facets of the stock, to see where or if it is a future investment of my own.
Before we get started with a more in-depth analysis, let's start by simply looking at the charts. The charts will give investors a snapshot of the previous price action, lending a hand in where the stock may head next. Below we'll use the 1-year and 3-year charts.
Nike 1-Year Chart:
The above 1-year chart is accompanied by the RSI and MACD indicators. It also has the 20-day, 50-day and 200-day simple moving averages. These averages will show the both the long- and short-term movements for Nike. As you can see on the chart above, Nike violated its long-term support of the 200-day sma in early July. After about six months, Nike finally regained traction and began its current uptrend.
This was confirmed when both Nike and the 50-day sma broke through the 200-day sma to the upside. When the 50-day sma breaks through the 200-day sma to the upside, this is known as a Golden Cross and is considered quite bullish by technicians. The support from the 20-day sma (green line) is evident as well, as Nike has bounced off of this measure several times since mid-December.
Nike 3-Year Chart:
The 3-year chart is slightly different than that of the 1-year chart. Although it utilizes both the RSI and MACD readings, it has different simple moving averages (10-week, 20-week and 40-week). These are used because the 3-year chart is a weekly chart, and not a daily chart. This is done for visualization purposes.
As you can see on the chart above, Nike continually tests, and often times violates, its 40-week sma, which is the long-term support. However, the overall trend is definitely up. This is quite evident, as Nike has trended from $30 in the beginning of 2011 to ~$55, a level it recently traded at on Monday (January 28th, 2013). The big correction came in the middle of 2012, where Nike fell from $55 to $42.50, before resuming its uptrend.
With the visual picture of how Nike has performed in the past several years, we will turn to its key growth numbers. For growth, we will analyze the Income Statement and the Cash Flow Statement. We'll begin by looking at revenue growth and earnings per share (EPS) growth, which are both found on the Income Statement. We will use the previous three years (2010-12), the current year's estimate (2013) and the future year's estimate (2014).
Revenues (In Millions):
(*) = Indicates that these figures are derived from future estimates.
As you can see in the table above, Nike has somewhat mediocre revenue growth. The last two years have shown impressive growth with 9.7% and 15.5% in 2011 and 2012, respectively. But the growth was negative coming off of 2009 and this something we don't like to see. It's also unimpressive that revenues are only expected to grow 5% in 2013 and 7.5% in 2014. Although these are only estimates, investors -- as well as myself -- would like to see higher growth than this. Let's look at EPS growth before moving on.
Earnings Per Share Growth:
(*) = Indicates that these figures are derived from future estimates.
Earnings per share growth is much more impressive than the revenue growth. Although EPS growth posted a negative figure for 2010 (just like revenues did), the forward looking growth is impressive. in 2012, Nike only grew its EPS by 7.7%, but is estimated to grow this figure by 11.4% and 13.6% in 2013 and 2014, respectively. Seeing double digit EPS growth is a good thing. Unfortunately, I would prefer to see revenue growth greater than 8% to go along with these impressive EPS estimates, which is above Nike's current estimates.
Now that we've examined the Income Statement, I want to move on to the Cash Flow Statement. More specifically, I will focus on Net Income, which will show how profitable Nike actually is. Learning what to look for on each of these statements is something that can and will greatly reward longer term investors, as they will know what to look for when a company reports earnings. Below are the previous four years (2009-12) for Nike's Net Income:
Net Income (In Millions):
Although these figures appear favorable while glancing at the table above, I see a more troubling trend. As a company matures and gets bigger, it's not uncommon for growth to slow, while income and profit continues to grow. But Nike isn't an "old, mature" company yet. The slowing growth rate which can be seen in the "Change (%)" column is slowing at a very alarming rate. This could be for a number of reasons, but most likely from increased competition taking market share from Nike.
Companies such as Under Armour (UA) or Lululemon (LULU) may be taking significant portions of Nike's customers away. Although UA and LULU specialize more in the clothing aspect of sporting goods, they have been making their way into athletic shoes and sporting goods equipment. These are areas that Nike has typically dominated for many years, but may be losing traction to other competitors.
Note: Under Armour reported excellent earnings this morning (January 31st) and could again, suggest market share is being taken from Nike.
With that in mind, I want to focus on valuation. For valuation, I will like at the P/E ratio, both currently and for future estimates. I will also examine multiple future PEG ratios, which measures a company's valuation, relative to its future growth. Below is a simple chart of Nike's P/E ratios:
((ttm)) P/E Ratio
Industry P/E Ratio
2013 P/E Ratio
2014 P/E Ratio
As you can see on the chart above, it would initially appear that Nike trades at a potentially overvalued state, relative to how much money it makes. However, when you compare it to the industry valuations, you'll note that it trades at about fair value to its competitors. You'll also notice that the valuation doesn't seem to "sink" when using forward looking P/E ratios. Typically, you'll see this number drop rather drastically the longer you look out, but at its farthest estimate, Nike's 2014 P/E ratio only drops to 18.
Now I want to take the P/E ratio and valuation one step further by using the PEG ratio. The PEG ratio measures a stock's valuation (the P/E ratio) and divides it by EPS growth, something we already did earlier in the analysis. What we get is a forward looking valuation that takes growth into consideration. Below are the 1-year, 2-year and 5-year results for the PEG ratio:
Note: The 5-year PEG estimate is taken from Yahoo! Finance.
A reading of 1 would typically indicate a fair valued stock, meaning the price of the stock is trading at a reasonable price relative to its future growth. A reading under 1 would indicate a potentially undervalued stock and a reading over 1 would indicate a potentially overvalued stock. With the lowest reading of 1.33 in 2014, the PEG ratio alone would indicate Nike is trading at a slightly overvalued state, when considering future growth.
To finish the analysis, there are some other key metrics I like to examine. Below you will find some of my key metrics, or other parts of the company that I find hold vital information when determining whether it is investment-worthy or not. Below, the results:
The debt is always something that's important to look at. You can find a company's debt level by looking at the Balance Sheet, which can be found on common sites such as Google Finance or Yahoo! Finance. Debt isn't always -- and usually isn't -- a bad thing. But it's something investors should look at and be aware of too. Nike's dividend is nothing to brag about, especially considering the low revenue growth that is currently expected. However, a 1.5% yield is fairly decent and something I would be happy to see as a shareholder.
I really like Nike, the brand. While the stock has some things going for it, such as the Golden Cross technical breakout and positive earnings, revenue and net income growth, I just don't see enough there to make me get long right now. I would need to do a deeper analysis on Under Armour to see if it is the culprit, but it appears that Nike shareholders are witnessing slower growth from increased competition.
This is fine, but I don't think of Nike as a Johnson & Johnson (JNJ) or Procter & Gamble (PG), which are better known as "moat" companies. The term moat indicates that these companies built huge business empires with large "moats" that keep other businesses within its industry from surpassing it. These companies have strong business models and pay out healthy dividends (usually greater than 3%). Now, I'm not saying Nike isn't a healthy or strong business, but that its growth is certainly questionable and it is certainly not a "moat" company either.
In my opinion, I would need to do a deeper analysis on Lululemon and Under Armour to see if sales are growing strongly, while Nike's are shrinking. This would indicate a stronger competitive landscape and would be potentially harmful to Nike's top and bottom lines. Personally, at this time, Nike does not suit my investments needs and does not have a place in my portfolio. Its growth is too low and inconsistent to be considered a growth stock and it is not a solid enough company to be considered one of my core companies, such as McDonald's (MCD), Disney (DIS), or Coca-Cola (KO).