Nike Shareholders: The New Suckers

| About: Nike Inc. (NKE)
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Summary

Shares of Nike are completely overvalued.

Recent earnings are overstated due to lower tax rate.

Earnings do not justify the current stock price.

Having written about the situation at Skechers (NYSE:SKX) and having received a lot of feedback, I recently looked at Nike (NYSE:NKE) and was appalled. Were these shareholders complete suckers or what?

An existing shareholder of Nike would undoubtedly be patting themselves on the back for being a long time shareholder and a much wealthier person today than when they bought. What I can't figure out however is who would pay these multiples for this company?

Let's not be fooled, Nike is a fantastic company with a fantastic brand and a fantastic product. In fact, it's one of the world's best. It is not however, a buy at its current level. Given the quality Nike has to offer, it is not a short either. It is similar to a large proportion of stocks in the market which lay somewhere in between as neither short nor long. The purpose of this analysis is to establish the buy price when it gets there.

Looking at Nike over the past 10 years, it is very clearly a behemoth of a company which is known the world over and although the growth in revenues and earnings per share EPS have been exceptional over the past few years, there will be no choice but to normalize in the near future. Taking a simple P/E ratio into consideration, we can see the range in P/E multiples has increased on both the low and the high side over the past 7 years. All share price information is from Google Finance and earnings numbers from the company's annual and quarterly reports. Please bear in mind the year end for Nike is May 31st, so the 2016 year (shown below) is ending May 31st, 2016. Please note all tables have been created by the author.

Share Price

Price / Earnings

EPS

High

Low

High

Low

Year 2016

68.20

47.25

31.57

21.88

2.16

Year 2015

52.75

36.57

28.51

19.77

1.85

Year 2014

40.13

29.56

26.93

19.84

1.49

Year 2013

33.04

21.28

24.47

15.76

1.35

Year 2012

28.70

19.24

24.32

16.31

1.18

Year 2011

23.12

16.58

21.02

15.07

1.10

Year 2010

19.64

12.54

20.25

12.93

0.97

Year 2009

17.57

9.56

19.97

10.86

0.88

Year 2008

17.65

12.88

20.52

14.98

0.86

Year 2007

14.28

9.44

19.83

13.11

0.72

Year 2006

11.44

9.57

17.33

14.50

0.66

Until 2011, paying over 20 times earnings was unheard of. In 2016, it would have been a deal. There is a problem here. Nike is not a cyclical company, or is it? Is the cycle running out? Well, referencing my article on SKX, there is also a similar growth in EPS, but not in the multiple. Let's take a look at SKX (information taken from my past article, bold is an estimate).

Share Price

Price / Earnings

EPS

High

Low

High

Low

Year 2016

34.27

22.50

17.14

11.25

2.00

Year 2015

54.50

18.40

36.33

12.27

1.50

Year 2014

21.60

8.80

23.74

9.67

0.91

Year 2013

11.60

5.70

32.22

15.83

0.36

Year 2012

7.50

3.70

125.00

61.67

0.06

It seems the shareholders of at least one of the companies must be duping themselves. The very recent share price for SKX may even have come under $21.00 as there was a recent downgrade of the stock. The earnings however remain consistent. Now, before you race to the bottom of the page and make the comment: "This is not a fair comparison" because Nike is diversified whereas SKX is more of a single skew type of company (shoes), let me be clear: This is not a straight up comparison based on multiples. This is a comparison based on the trend in multiples. The trend in Nike's P/E is increasing, whereas the trend at SKX is for the most part neither increasing nor decreasing.

With such a wonderful company like Nike, why not just hold for the dividend? Isn't it as recognizable as Coca-Cola (NYSE:KO)?

Well, yes it is as recognizable as Coca-Cola, but the dividend is just not enough to get me excited. Here is the potential yield for any buyer in the past 10 years. Again, the year end for Nike is May 31st.

Annual Dividend

Share Price

Yield as a %

High

Low

In $

High

Low

Year 2017

60.33

51.48

Year 2016

68.20

47.25

0.60

0.88

1.27

Year 2015

52.75

36.57

0.52

0.99

1.42

Year 2014

40.13

29.56

0.47

1.17

1.59

Year 2013

33.04

21.28

0.41

1.24

1.93

Year 2012

28.70

19.24

0.35

1.22

1.82

Year 2011

23.12

16.58

0.30

1.30

1.81

Year 2010

19.64

12.54

0.27

1.37

2.15

Year 2009

17.57

9.56

0.25

1.42

2.62

Year 2008

17.65

12.88

0.22

1.25

1.71

Year 2007

14.28

9.44

0.18

1.26

1.91

Year 2006

11.44

9.57

0.15

1.31

1.57

It seems 2% is just too much to ask - with a few exceptions. It is clear investors are not buying the stock for the dividend yield, it is for the capital appreciation, but where is the capital appreciation to be found?

Just yesterday, Nike announced their Q1, 2017 earnings and it was as follows:

Revenues were 9.061 Billion and Earnings per share were $0.75 with a tax rate of only 2.5% compared to 18.4% in the same quarter one year ago. The 2016 tax rate was much closer to 20% with the average in prior years coming in at close to 25%. It seems this is an abnormality. Looking at the past quarterly revenues and EPS, they are trending upwards:

Q1

Q2

Q3

Q4

Year 2016

Rev.

8414

7686

8032

8244

25.99

23.74

24.81

25.46

EPS

0.67

0.45

0.55

0.49

31.02

20.83

25.46

22.69

Year 2015

Rev.

7982

7380

7460

7779

26.08

24.12

24.38

25.42

EPS

0.54

0.37

0.45

0.49

29.19

20.00

24.32

26.49

Year 2014

Rev.

6971

6431

6972

7425

25.08

23.13

25.08

26.71

EPS

0.43

0.30

0.38

0.38

28.86

20.13

25.50

25.50

Assuming the Q1, 2017 EPS represent 30% of the total EPS, the total should be approximately $2.50 (if the tax rate remains low). Further, the estimates at Value Line for 2017 were most recently $2.35 for fiscal 2017.

At a P/E of 25 times, that's a share price of $50, still less than the after-hours price for Nike. Nike is not a company to buy at these levels. It is evident.

Fair and full disclosure: I am long SKX and not NKE.

In order for me to get excited about buying Nike shares, I would have to see them trading at no more than 15 times earnings, translating to $37.50 per share. Bottom line: I do not believe Nike is a defensive stock which deserves a higher valuation.

My previous article on SKX can be found here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.