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Office Hours: Nike Valuation

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This Office Hour session was held on 10/12/2017 and discusses our valuation of iconic sportswear brand, Nike (NKE). We were originally asked to look at Nike’s valuation by a long-time Framework member, Wilson M.

A lot of investors hold Nike, and it is undoubtedly a well-run company that is a true giant in its industry. However, even using fairly generous valuation assumptions, the firm looks as though it is on the cusp of overvaluation. Owners of Nike are encouraged to share your views via Framework’s Nike Forum. You can download a copy of the Framework valuation model for Nike and watch a copy of our Five-Minute Valuation video of the company via our Research Archive.

The total recording is around 45 minutes long, broken into smaller, more digestible bits.


Introduction

What kind of company is Nike? It’s a growth company – just ask Nike’s IR department… In this video, we look at Nike’s numbers and talk about why Nike’s Return on Equity value is so high.


Revenue Overview

We take a quick look at our best- and worst-case revenue forecasts and discuss some of the near-term and bigger picture dynamics.


Currency Effects

One of the most confusing parts of analyzing a company that does business overseas is how to think about foreign currency translation. In this video, we delve into how we analyzed Nike specifically and discuss what we think is a reasonable way to think about currency translation in general.


Profit Overview

Here, we offer our best- and worst-case profit forecasts, note the absolute stability of Nike’s profit margin, and dig into the Statement of Cash flows to figure out why there are spikes in profitability in two different years.


Operational Leverage

In our profit analysis, we noted that Nike’s profit growth is more rapid than its growth in revenues during the period from 2013 through present. When profits grow faster than revenues, it is termed “operational leverage.” In this section, we dig into the root cause for Nike’s sudden uptick in operational leverage.


An Analysis of Morningstar’s Profit Argument

Morningstar is very bullish on Nike and their published fair value estimate is significantly higher than our best-case valuation scenario. The reason for their bullishness is that the analyst assumes the company will be able to significantly raise profitability over the next 10 years. In this video, we assess that claim.


Chinese Profitability

While Morningstar’s contention that Nike’s structural profitability will increase from share of its DTC channel, looking through the data, we realized that Nike’s Chinese revenues were growing quickly and that the segment was much more profitable than others. Might Nike’s structural profitability be boosted by its rapidly-expanding Chinese business?


Profit Take-Aways

We review our forecasts of Nike’s short-term profitability and summarize our view regarding Morningstar’s argument and the influence of Nike’s Chinese business on its overall profitability.


Investment Spending

Nike is a mature company in a mature industry, so the only thing I have to say about its investment spending is that it sure issues a lot of stock to executives!


Investment Efficacy / Medium-Term Cash Flow Growth

One fact is undeniable: Nike has been successful at growing its owners’ profits quickly for a long time. That said, the industry is essentially fad-based. We’ll give Nike the benefit of the doubt due to its past success.


Valuation

Long story short, Nike shares look a little toppy right now.

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