In-Depth Analysis: Nike Stock Valuation and Financial Assessment

This report assesses the stock value of Nike using a discounted cash flow (DCF) model. It begins by introducing Nike's background and its focus on shareholder value. The DCF methodology, involving projecting future cash flows and discounting them to present value, is explained. The free cash flow and weighted average cost of capital (WACC) are calculated, with significant assumptions detailed for cash flow estimation and terminal value. The analysis reveals that Nike's stock is currently overvalued, suggesting investors are overpaying. Despite this, Nike remains a strong brand with solid market positioning, making it a relatively safe investment. The report concludes with a recommendation that Nike should trade its stock at lower valuations, despite its overall strength in the sports apparel and athletic footwear market. Desklib provides this and other solved assignments to aid students in their studies.

Finance

Table of Contents
Introduction...........................................................................................................................................2
Main Context.........................................................................................................................................2
Valuation...........................................................................................................................................2
Free cash flow................................................................................................................................2
Weighted average cost of capital...................................................................................................3
Significant assumptions.................................................................................................................4
Cash flow estimation.....................................................................................................................4
Terminal value...............................................................................................................................4
Conclusion and recommendations.........................................................................................................5
References.............................................................................................................................................6
1

Introduction
Nike was established by Phil Knight and Bill Bowerman in January 1964 by. It has also
acquired other popular brands such as Hurley International LLC, Cole Haan, Umbro Ltd,
Converse INC. Nike has most of its contract factories in Vietnam and provides products all
over the world. The corporation has its retail shops in almost every corner of the world and
also sells products online through its website. The organization focuses more on its
shareholder’s value and its main objective is to make a profit for them. Nike mainly target
athlete and sportsman for selling products. Its main goal is to change the world of every
sportsman by providing quality products and services. The stock value of Nike will be
determined and examined with the use of a valuation technique. The discounted cash flow
model will be used for evaluating the stock value and providing significant information to the
investors (Nike, 2018).
Main Context
The discounted cash flow is considered to be a direct valuation method of valuing an
organization by projecting the future flow of cash and discounting with the present value of
money. Discounted cash flow is being used to measure the value of any corporation, asset or
any project through the conception of the time value of money. DCF helps to calculate the
money for an investor who supposed to receive from an investment. The estimation will be
carried out in two stages (Holton, 2012, p.244). The first stage depicts a high rate of growth
and the second stage is to assume the growth rate is stable. The measurement of the cash
flows for the next five years is to be done for the organization. The cash flows are to be
discounted to measure the present value. The uncertainties in the market can affect the
business operations of Nike which will lead to the uneven growth of the organization. The
share price of the organization depicts its current value in the market. The development of
business operations leads to an increase in the value of shares. The current share price of
Nike is $76.36
Valuation
2

Free cash flow
The free cash flow shows the flow of cash during a time period of an organization. The free
cash flow of Nike is estimated by deducting the capital expenses from the cash flow from
business operations.
Free Cash flow (2018) = Capital expenditures + cash flow from operations
= 4955+ (-1028)
= $3967m
Weighted average cost of capital
The weighted average cost of capital is referred to the rates that an organization will going to
pay the investors for financing its assets (Needles & Powers, 2012, p.366).
WACC=E/ (E + D)*Cost of Equity + D/ (E + D)*Cost of Debt*(1 - Tax Rate)
Equity = $121267.95m
Debt = $3806m
Weight of equity = E/(E+D)
= 121267.95/(121267.95+3806)
= 0.96
Weight of debt = D/(E+D)
= 3806(121267.95+3806)
= 0.030
Risk free rate = 3.22%
Beta = 0.96
Market premium = 6%
Cost of equity = 3.22%+0.96*6%
= 8.98%
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Interest expense= $54m
Debt = $3806
Cost of debt = 54/3806
= 1.41%
Average tax rate = 34.26%
WACC= 0.96*8.98%+0.030*1.41 %*( 1-34.26%)
= 8.74%
Significant assumptions
The most significant inputs into the discounted cash flow are an actual flow of cash and
discount rate. The discount rate has been estimated with assistance of the weighted average
cost of capital. The growth rate of the free cash flow has been assumed for the next five
years. The assumptions are made on the basis of ups and downs that the organization can face
in the business environment (Phylaktis, 2014, p.115).
Cash flow estimation
Cash flow estimate 2018 2019 2020 2021 2022
Leveraged free cash flow 3967 4165.35 4498.57 4813.47 5054.14
Present value (8.74%) 3648.15155
4
3568.05
7
3549.44
8
3599.12
5
3642.88
6
Growth rate 8% 10% 7% 5%
Present value 17436.5442
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The present value of flow of cash for the next 5 years = $17436.54
The second stage consists of the terminal value which depicts the flow of cash after the first
stage. For estimating the terminal value, Perpetuity method is used for estimating the terminal
value at the annual growth rate and it is equal to government bond rate for 10 years (2.3%)
(Simmons, 2017, p.175).
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Terminal value
The terminal value shows the future flow of cash of the organization.
Terminal value = Free cash flow (2022)*(1+g)/(discount rate-g)
Terminal value = $5054.14*(1+2.3%)/(8.74%-2.3%)
Terminal value measurement on the basis of the Perpetuity method = $96530.93
Present value of the terminal value = $88772.23
The equity value constituted of the sum of the current value of cash flows.
Equity value = Present value of next five years flow of cash + terminal value
=$17436.54+$88772.23
=$106208.77
The next step is equity value would be divided by the outstanding numbers of shares.
However, if the stock is identified to be depositary receipts then the equivalent number can be
used (Smart, 2008, p.236).
Value = Total equity value/outstanding shares
= $106208.77/1600.55
Value per share = $66.35
The current share price of Nike is $76.36 and the intrinsic value is $66.35. The value depicts
that stock of Nike is overvalued (Ross, Westerfield & Jaffe, 2010, p.423). The investors
always expect higher returns from the investment that they invest into the organization. The
organization always put efforts to increase returns on the funds invested by the investors.
Conclusion and recommendations
The evaluation of stock value has depicted that Nike is overvalued. It means that the investors
are overpaying. Nike is considered to be the market leader in the sports apparel and athletic
footwear sector in the world. However, the competition in the sports industry has increased
such as Adidas has depicted significant growth in recent years (Wolf, 2010, p.85). A great
organization cannot be always good at maintaining its stock value. Thus, Nike should trade
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its stock at low valuations because it is overvalued. However, Nike still remains a good and
safe option for the investors to invest fund because it has strong brand value and market
positioning.
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References
Holton, R. (2012). Global finance (1st ed.). London: Routledge.
Needles, B., & Powers, M. (2012). Financial accounting (11th ed.). Mason, OH: South-
Western Cengage Learning.
Nike. (2018). Form 10-K. Retrieved from
https://s1.q4cdn.com/806093406/files/doc_financials/2018/ar/docs/nike-2018-form-
10K.pdf
Phylaktis, K. (2014) Finance (8th ed.). Elsevier Science.
Ross, S., Westerfield, R., & Jaffe, J. (2010). Corporate finance (15th ed.). New York:
McGraw-Hill/Irwin.
Simmons, D. (2017). An intrinsic value calculation for NIKE Inc (NKE) shows investors are
overpaying. Retrieved from https://simplywall.st/news/an-intrinsic-value-calculation-for-
nike-inc-nke-shows-investors-are-overpaying/
Smart, S. (2008). Corporate finance (6th ed.). [Place of publication not identified]: Cengage
Learning.
Wolf, M. (2010). Fixing global finance (12th ed.). Baltimore, Md.: Johns Hopkins University
Press.
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