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Nike Inc. creates some very good athletic apparel (in addition to some great commercials!), but is that enough for the company to be a worthwhile investment? Intelligent Investors must base their investment decisions on fundamental analysis and factual data, in an effort to eliminate risk and speculation. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Nike Inc. fares in the ModernGraham valuation model.

NKE Chart

NKE data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$72.69
MG Value$61.49
MG OpinionOvervalued
Value Based on 3% Growth$37.36
Value Based on 0% Growth$21.90
Market Implied Growth Rate9.86%
NCAV$8.03
PEmg28.21
Current Ratio3.53
PB Ratio5.69

Balance Sheet - 11/30/2013

Current Assets$13,607,000,000
Current Liabilities$3,851,000,000
Total Debt$1,201,000,000
Total Assets$17,820,000,000
Intangible Assets$516,000,000
Total Liabilities$6,476,000,000
Outstanding Shares888,000,000

Earnings Per Share

2014 (estimate)$2.89
2013$2.69
2012$2.37
2011$2.20
2010$1.93
2009$1.51
2008$1.87
2007$1.47
2006$1.32
2005$1.12
2004$0.88
2003$0.69

Earnings Per Share - ModernGraham

2014 (estimate)$2.58
2013$2.33
2012$2.09
2011$1.90
2010$1.70
2009$1.55

Dividend History

NKE Dividend Chart

NKE Dividend data by YCharts

Conclusion:

Nike has exhibited some great growth, and has many qualities that make it very attractive; however, the company is not suitable for the Defensive Investor because it is trading at too high PEmg and PB ratios. Enterprising Investors are not as concerned about those ratios, though, and the company passes all of the requirements for that investor type. As a result, Enterprising Investors following a ModernGraham approach should feel comfortable proceeding with further research into the company, including a review of other companies that pass the ModernGraham requirements.

As for a valuation, Nike has grown its EPSmg (normalized earnings) from $1.55 in 2009 to an estimated $2.58 for 2014. This solid level of growth is impressive, but it lags behind the market's implied growth estimate of 9.86%, leading the ModernGraham valuation model to return an intrinsic value estimate that is below the market's price. Therefore, it would appear that Nike is currently overvalued.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Nike Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Nike Inc. (NKE) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Nike Inc.