- Nike’s product lines highlight important growth drivers.
- My assumptions in the Levered Returns valuation models yield a fair value per share of $89, above its August 20th closing price of $78.91.
- Share price does not currently reflect the fact that Nike is one of the world’s most widely recognized brands.
Nike's Product Lines
Nike (NYSE:NKE) engages in the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services. According to the company, Nike is the largest seller of athletic footwear and athletic apparel in the world. Products are sold through retail accounts, company-owned retail stores, nike.com, and a mix of independent distributors and licensees throughout the world. I believe understanding Nike's product lines sheds light on the company's important growth drivers. Thus, I've built a revenue forecast on a product line basis for the company:
The company's product lines are as follows (per 10-K):
- Footwear products (58% of Sales) - Footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. Sportswear, Running, Basketball, and Football (Soccer) are currently the top-selling footwear categories.
- Apparel products (29% or Sales) - Apparel and accessories covering most of the above-mentioned categories, which feature the same trademarks and are sold predominantly through the same marketing and distribution channels as athletic footwear. Nike also markets apparel with licensed college and professional team and league logos.
- Equipment products (6% of Sales) - Nike sells a line of performance equipment under the Nike Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment designed for sports activities.
- Global Brand Divisions & Corporate (1% of Sales) - Global Brand Divisions primarily represent Nike Brand licensing businesses that are not part of a geographic operating segment. Corporate consists largely of unallocated general and administrative expenses, including expenses associated with centrally managed departments, depreciation and amortization related to the company's headquarters, unallocated insurance and benefit programs, including stock-based compensation, certain foreign currency gains and losses, including certain hedge gains and losses, certain corporate eliminations and other items.
- Converse segment (6% of Sales) - Designs, markets, licenses, and sells casual sneakers, apparel, and accessories under the Converse brand name. Nike bought Converse from Perseus LLC in 2003 for approximately $305 million implying an EV/LTM EBITDA multiple of 9.5x.
DCF Valuation Model
These revenue and profitability growth drivers are reflected below in the Levered Returns discounted cash flow analysis model to determine an Enterprise Value. I then deduct net debt, after-tax underfunded pension obligations and dividends payable to conclude the total equity value and resulting per share value for the company:
Other Key Assumptions
Capital Expenditures: Nike has historically spent between 1.8% to 3.2% of sales on capital expenditures. I've selected 3.0% which is consistent with what equity research analysts are projecting according to Thomson Reuters.
Working Capital: I've selected 15.9% which equals the average net working capital dollar amounts over the last four quarters as a percentage of sales.
Discount Rate: To estimate the discount rate for Nike, I used the Levered Returns discount rate model which you can assess below:
Based on my assumptions in the Levered Returns 5 year DCF analysis above, Nike appears undervalued with a fair market value price target of approximately $89. The company is one of the world's most widely recognized brands with athletic products spanning footwear, apparel, and equipment. Furthermore, the products are sold globally mitigating risks from any specific product or market. Nike has been able to maintain and improve its brand equity over the last several decades through product innovation and unique marketing. I expect this trend to continue and recommend value investors to hold on to their NKE shares and enjoy the dividends along the way. However, play with the inputs above to come to your own conclusion if you believe my assumptions are too aggressive.