Good Finance Case Study Example

Valuation of a Public Company: Nike Inc.

About the company
Nike Inc. is an American multinational organization that designs and manufactures sports footwear, apparel and accessories. The company was originally founded as Blue Ribbon Sports in 1961 when it started its operations through sales on distribution basis for a Japanese footwear company, Onitsuka Tiger. However, the founders, Phillip Knight and Bill Bowerman, soon started their own company in 1971, while its brand logo, ‘’Just Do It’’ was patented in 1974. At present, the company has the largest market share in sports footwear industry, where it revenue exceeds $28 Billion. As of 2014, the brand value of the company was itself of $19 billion, making it the most valuable brand in the sports industry.
Nike Inc. was listed on New York Stock Exchange in 198 with the ticker symbol of, ‘NKE’.

Business Analysis- Nike Inc.

-Political Factors
Nike Inc. has largely benefitted from the industry-friendly political environment in the United States. Many factors of the US Government such as low interest rates, stable currency conditions and competitive tax system, has all worked in the favor of the company.
-Macroeconomic Factors
Nike Inc., being a consumer facing entity is largely dependent on the macroeconomic factors prevailing in the country. Important to note, just like any company, Nike Inc. did faced a sluggish demand during the financial crisis of 2007-08 that eroded the purchasing power of the consumers to a large extent. However, the company has been able to cash its established brand value by generating its sales not only from US, but also from the promising economies of China and India.
-Technological Factors
Nike Inc. has been effectively deploying the latest technology both for estimating the demand and in the manufacturing process. Thus, using the advanced technology assists the company in achieving the differentiation, segmentation and economies of scale.

Financial Fundamentals

Below are the basic financial fundamentals of Nike Inc.
Stock Price: $99.66
Ticker Symbol: NKE
Beta: 1.01
52-week range: 70.60-103.79

PE Ratio(Trailing): 28.48

EPS: $3.05
Dividend Yield: 1.10%
PEG Ratio: 2.30
Ratio Analysis
a) Liquidity Ratios
-Current Ratio: Current Assets/ Current Liabilities
2013: 13626/3926= 3.47
2014: 13696/5027= 2.72
- Acid Ratio: (Cash + Receivables)/Current Liabilities
2013: (5965+3117)/3926= 2.31
2014: (5142+3434)/5027= 1.70
b) Profitability Ratios
-Net Profit Margin: Net Profit/Revenue
2013: 2485/25313= 9.81%
2014: 2693/27799= 9.78%
-Return on Equity: Net Income/ Total Equity
2013: 2485/11156= 22.27%
2014: 2693/10824= 24.87%
c) Solvency Ratios
-Gearing Ratio: Total Debt/ Total Equity
2013: (178+1210)/11156= .12
2014: (174+1199)/10824= .12
-Financial Leverage: Total Assets/ Total Equity
2013: 17584/11156= 1.57
2014: 18594/10824= 1.71
d) Asset Utilization Ratios
-Days of Inventory: (365*Inventory)/Revenue
2013: (365*3434)/25312= 49 Days
2014: (365*3947)/27799= 50 Days
-Total Asset Turnover= Revenue/ Total Assets
2013: 25312/17584= 1.43
2014: 27799/18594= 1.50
e) Valuation Ratios
-Price-Earnings Ratio: Market Price/ Earnings per share
2013: 57.41/2.77= 20.72
2014: 73.86/3.05= 24.21
-Price to BV Ratio: Market Price/ Book Value per Share
2013: 57.41/12.39= 4.63
2014; 73.86/12.44= 5.93

Valuation Analysis

-Dividend Discount Model

Calculative Notes:

a) Cost of Equity (using CAPM Model)
= Risk-free rate+ Beta (Return on market portfolio-RFR)
= 2+ 1.01(13.93-2)
= 14.05%
b) Terminal year growth rate (calculated using Gordon Growth Model)
g = 100 × (Value of Stock × Cost of Equity – Current Dividend) ÷ (Value of Stock+ Current Dividend) = 100 × ($99.66 × 14.05% – $0.93) ÷ ($99.66 + $0.93) = 13.00%
b) Initial year growth rate (calculated using ROE*RR multiples)

Formulas used:

Retention Rate= (Net Income-Dividend)/Net Income

Net Income margin: Net Profit/ Revenue

Asset Turnover: Revenue/ Total Assets
Financial Leverage: Total Assets/ Total Shareholder Equity
Growth Rate= RR*Net Income Margin*Asset Turnover*Financial Leverage
c) Penultimate year’s growth rate (calculated using interpolation method between terminal year growth rate and initial year growth rate)
Growth Rate (year 2) = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)= 15.22% + (13.00% – 15.22%) × (2 – 1) ÷ (5 – 1) = 14.67%
Growth Rate(Year 3) = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)= 15.22% + (13.00% – 15.22%) × (3 – 1) ÷ (5 – 1) = 14.11%
Growth Rate(Year 4) = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)= 15.22% + (13.00% – 15.22%) × (4 – 1) ÷ (5 – 1) = 13.55%
-Free Cash Flow Model

Calculative Notes:

a)The terminal year growth rate has been calculated using single-stage model using the following formula:
  = 100 × (Fair value of debt and equity capital × WACC – FCFF0) ÷ (Fair value of debt and equity capital + FCFF0)= 100 × (87,421 × 13.88% – 1,999) ÷ (87,421 + 1,999) = 11.34%
b) Beginning year growth rate calculating using the following formula:
Growth Rate= RR(average)* ROIC(average)
= 0.70*19.70
= 13.80%.

Recommendation: Buy

Referring to our above discussion and valuation models, we witnessed that the company Is going through a strong financial run with sustainable profitability. Moreover, the two valuation models we employed, i.e DDM and Free-Cash Flow, provided evidence that the stock is relatively undervalued, and will provide good returns for the investors.

Works Cited

"Annual Report." 2010-2014.
Company Summary-Nike. n.d. 4 April 2015 <https://in.finance.yahoo.com/q?s=NKE>.
O'Reilly, Lara. 11 Things Hardly Anyone Knows About Nike. n.d. 4 April 2015 <http://www.businessinsider.in/11-Things-Hardly-Anyone-Knows-About-Nike/articleshow/45037954.cms>.
Tem, Trefis. Nike's China Problem. n.d. 5 April 2015 <http://www.forbes.com/sites/greatspeculations/2014/03/21/nikes-china-problem/>.