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Summary

  • Nike Inc. qualifies for the Enterprising Investor.
  • The ModernGraham Valuation Model finds Nike Inc. to be overvalued.
  • The market is implying a growth rate of 9.97%.

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 or by reviewing a list of the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor. 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. (NYSE:NKE) 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$73.45
MG Value$61.95
MG OpinionOvervalued
Value Based on 3% Growth$37.46
Value Based on 0% Growth$21.96
Market Implied Growth Rate9.97%
NCAV$7.65
PEmg28.43
Current Ratio3.39
PB Ratio5.81

Balance Sheet - 2/28/2014

Current Assets$13,410,000,000
Current Liabilities$3,954,000,000
Total Debt$1,201,000,000
Total Assets$17,803,000,000
Intangible Assets$517,000,000
Total Liabilities$6,670,000,000
Outstanding Shares881,000,000

Earnings Per Share

2014 (estimate)$2.91
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 Inc. qualifies for the Enterprising Investor but not the Defensive Investor. The company passes all of the requirements of the Enterprising Investor, but the PEmg and PB ratios are too high for Defensive Investors. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel very comfortable proceeding with further research into the company and comparing it to other opportunities found in the ModernGraham Valuation Index. From a valuation perspective, the company appears overvalued after growing its EPSmg (normalized earnings) from $1.70 in 2010 to an estimated $2.58 for 2014. This is level of demonstrated growth does not support the market's implied estimate of 9.97% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls below the price.

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?

Source: Nike - Quarterly Valuation