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Investment Thesis
- The Jordan Brand has been a huge success factor for Nike since signing Michael Jordan back in 1984.
- I assume that the Jordan Brand will continue to make an important contribution to Nike's success in the future and will remain one of the company's growth drivers.
- My valuation model shows that Nike is currently undervalued with an upside of 7.4%.
- I rate Nike as a buy, due to its strong brand image, endorsements with some of the world’s top athletes, the contribution of the Jordan Brand to the company’s success as well as their overall growth prospects.
Company Results In 3Q22
Nike (NYSE:NKE) generated a revenue of $10.871 billion in 3Q22. This is an increase of 5% in comparison to 3Q21, where a revenue of $10.357 billion was generated. Gross profit went up from $4.719 billion in 3Q21 to $5.067 billion in 3Q22, resulting in a rise of 7%. Nike’s revenue growth reflects the company’s robust and stable business model as well as its strong brand image.
Geographically speaking, Nike’s revenue growth was mainly driven by gains the company made in North America, which is its largest market. In North America, Nike’s revenue increased from $3.564 billion in 3Q21 to $3.882 billion in 3Q22. This is a rise of 9%.
Nike’s direct sales were up $4.6 billion, which is an increase of 15% compared to the same period of the previous year. On a currency-neutral basis, Nike’s direct sales were up by 17% in 3Q22 in comparison to 3Q21.
The 15% revenue growth in Nike's direct sales is evidence of the sporting goods manufacturer's successful online strategy. Due to Nike's strong brand, as well as their partnerships with various top athletes in the world, which helps the them gain a high media reach, I assume that the company will be able to grow with similar growth rates in its online business in the years to come.
In 3Q22, Nike returned about $1.7 billion to its shareholders. This included dividends to the amount of $484 million and share repurchases of $1.2 billion. The dividend went up 12 percent in comparison to the previous year, indicating that the Nike stock is especially attractive for dividend income-investors.
The Contribution Of The Jordan Brand To The Success Of Nike
The Jordan Brand focuses primarily on athletic and casual footwear as well as on apparel and accessories. The brand uses the Jumpman trademark. According to Forbes Magazine, Nike has paid Michael Jordan about $1.3 billion since he signed his first contract with the U.S. sporting goods manufacturer back in 1984. According to the magazine, it was the richest endorsement deal ever made and helped the company to convert itself into one of the most valuable consumer brands in the world.
Michael Jordan was the first athlete to sign a lifetime partnership contract with the company. At the time when Nike and Michael Jordan signed the contract, competitor adidas was still 50% larger by revenue than Nike.
Revenue of the Jordan Brand in 2021
In 2021, the Jordan Brand generated a revenue of $4.711 billion. This means that in 2021, the Jordan Brand accounted for 13.17% of Nike’s wholesale revenues. Hereby, the Jordan Brand is the second most important product category for Nike behind Sportswear (with a revenue of $15.053 billion in 2021 and accounting for 42.08% of the company’s wholesale revenue) and in front of Running (with a revenue of $3.987 billion of revenue in 2021 and accounting for 11.14% of the wholesale revenue) as well as the product categories Training ($2.907 billion of revenue), Nike Basketball (with a revenue of $1.692 billion) and Football (Soccer) (with a revenue of $1.682 billion).
The fact that the Jordan Brand is Nike's second most important product category after Sportswear, shows us the enormous importance that the Jordan Brand has for the company. The words of Nike founder Phil Knight also illustrate the importance of the Jordan Brand: in an interview with USA Today, he described signing Michael Jordan as the best business decision he has ever made.
Nike’s Growth Opportunities Through The Jordan Brand
Compared to 2020 (in which the revenue of the Jordan Brand was $3.609 billion), the revenue of the Jordan Brand increased by 31% in 2021. This data highlights that it was one of the major growth drivers for Nike when comparing fiscal year 2021 with fiscal year 2020. The Jordan Brand was the product category with the most growth in 2021 compared to 2020. This data once again highlights the enormous importance of the Jordan Brand for Nike.
According to data from Seeking Alpha, analysts are currently estimating a revenue growth for Nike of between 7% and 14% year-over-year in the periods between 1Q23 and 4Q24. Given Nike’s growth opportunities, these predictions seem to be realistic for me.
From my point of view, Nike has several growth drivers, which will contribute to their growth in the future. I expect the company to still have huge growth potential through direct sales. This is due to various factors: One is the strength of Nike's brand image, which enables the company to sell its products directly to consumers and less through retailers. Secondly, through Nike's partnerships with the best athletes in the world. These allow the company to achieve an enormous media reach.
The Jordan Brand in particular also plays a major role here. Due to the enormous strength of the Jordan Brand image in combination with the strong financial results it has brought Nike in the past, I assume that the Jordan Brand will continue to be one of Nike's growth drivers in the future.
Valuation
In terms of valuation, I have used the EPS Multiplier Method to determine the intrinsic value of Nike. The method calculates a fair value of $122.88 for the company. At the current share price, this results in an upside of 7.4%.
The Seeking Alpha EPS FWD Long Term Growth (3-5Y CAGR) Rate of Nike is 15.68%. I have decided to make more conservative assumptions and therefore, I assume an EPS growth rate of 12% for the company over the next 10 years. Next, I assume an average annual growth rate of 5% for the following 10 years. I have used Nike’s current discount rate (WACC) of 8.5% to calculate the company’s fair value.
My calculations are based on the following information as presented below:
Company Ticker | NKE |
EPS | $3.87 |
Discount Rate | 8.5% |
Growth Rate for the First 10 Years | 12% |
Growth Rate for the Next 10 Years | 5% |
Current Stock Price | $114.44 |
PE Ratio | 29.57 |
Source: The Author
Based on the above assumptions, I calculated the following results:
Intrinsic Value | $122.88 |
Current Stock Price | $114.44 |
Margin of Safety | 6.90% |
Upside/Downside | 7.4% |
Source: The Author
Relative Valuation Models
Nike’s P/E (FWD) Ratio
Nike’s P/E Ratio is currently 31.91. This is 10.27% below its average P/E Ratio from the last five years, which is 35.56. This provides further evidence that the company is currently undervalued.
Nike’s Beta
The stock of Nike has a beta of 0.96, which is below that of the broader stock markets (with a beta of 1). This shows that an investment in Nike could not only contribute to the long-term growth of your investment portfolio, but also to the reduction of its volatility. These factors make Nike a very interesting buy-and-hold-investment from my point of view.
Nike in comparison to some of its competitors:
In terms of market capitalization ($196.25 billion) and revenue ($46.82 billion), Nike is by far the largest sporting goods manufacturer in the world. Comparing Nike to its competitors, such as Adidas (OTCQX:ADDYY), Puma (OTCPK:PMMAF), Under Armour (NYSE:UA), Lululemon Athletica (LULU) and V.F. Corporation (VFC), it can be highlighted that Nike's EBIT margin of 15.40% is only below Lululemon Athletica (which has an EBIT margin of 21.97%), but is higher than adidas (9.37%), Puma (8.57%), Under Armour (9.23%) and V.F. Corporation (13.79%). Nike’s high EBIT margin is another indicator of their strong position in the sporting goods industry and the competitive advantage they have over their competitors.
Although Nike's dividend yield of 1.03% is relatively low compared to some of its competitors (V.F. Corporation, for example, has a dividend yield of 4.07%), Nike’s dividend growth rate of 11.27% and the low dividend payout ratio of only 30.61% makes them an attractive long-term investment. The company’s low dividend payout ratio also gives them room for future dividend enhancements. These factors make Nike an appealing investment, especially for dividend income investors aiming to invest on a long-term basis and who are seeking dividend growth.
The fact that Nike has consistently managed to increase its dividend over the past 20 years, is further evidence of their robust business model and is a result of the company’s strong brand image. Based on these strengths and low dividend payout ratio, as well as its growth prospects through direct sales that are supported by the Jordan Brand, I expect that Nike will be able to keep increasing its dividend in the years to come.
Risks
In my view, one of the biggest risks of investing in Nike is the danger the company would face if their brand image were to get damaged. According to Forbes, Nike is currently the 13th most valuable brand in the world.
This brand image could be damaged if, for example, one of the athletes endorsed by Nike, was involved in a scandal. Nike's image could then be affected negatively which could subsequently damage the company’s brand value. This could have a serious impact on the company's financial results.
Furthermore, the company operates in a market environment in which environmental conditions are changing rapidly. For example, certain consumer trends could change, and if Nike doesn't forecast these changes early enough, it could impact their business results.
Another risk I see in investing in Nike is the intense competition the company faces. The athletic footwear as well as the apparel and equipment industry are all extremely competitive, not only in the U.S. but also worldwide. This intense competition, especially with Adidas and Under Armor, could result in a negative impact on Nike's profit margin.
However, due to the enormous strength of Nike’s brand image as well as Nike’s endorsements with the best athletes in the world, I expect the company will be able to assert itself against its competitors in the long-term.
The Bottom Line
My valuation model indicates that Nike is currently undervalued with an upside of 7.4%. The fact that Nike’s P/E (FWD) Ratio is currently 31.91, which is 10.27% below its average from the last five years (35.56), gives us yet another indicator that the company is currently undervalued.
In my opinion, the Nike stock is attractive for long-term investors who primarily focus on dividend growth. With an average dividend growth per year of 11% in the last 5 years and a dividend payout ratio of only 30.61%, which still offers a lot of scope for future dividend increases, Nike is a good fit for investors looking for a growing dividend stock.
Personally, I am invested in Nike and see the company as a long-term investment.
Based on Nike's current valuation and long-term competitive advantages over its competitors, combined with the company's growth prospects, driven by increasing direct sales and revenue of its Jordan Brand, I rate Nike as a buy.
However, the company’s current P/E (FWD) Ratio of 31.91 compared to Adidas (P/E (FWD) Ratio of 11.58) proves that you have to pay a substantial premium to buy the Nike stock compared to its competitors. So, if you are looking for a less expansive stock from the sporting goods sector, you could instead have a look at the stocks of Adidas, Under Armor (P/E (FWD) Ratio of 20.86) or V.F. Corporation (P/E (FWD) Ratio of 14.11).
In my view, the premium, which you pay on the Nike stock in comparison to its competitors, is justified especially due to Nike's strong brand image, which results in a long-term competitive advantage over its rivals from the sporting goods manufacturer industry.
Thank you for reading and I would appreciate any feedback regarding my article!
