NIKE, INC



NIKE, INC.

Ticker Symbol: NKE (NYSE)

Sector: Consumer Cyclical

Industry: Footwear

FUNCTION:

NIKE, Inc. is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and accessory products. It sells its products to approximately 18,000 retail accounts in the United States and through a mix of independent distributors, licensees and subsidiaries in nearly 200 countries. NIKE's athletic footwear products are designed for specific athletic use, although some of its products are worn for casual or leisure purposes. The Company creates designs for men, women and children. Running, basketball, children's, cross-training and women's shoes are the Company's top-selling product categories. NIKE also markets shoes designed for outdoor activities, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking and other athletic and recreational uses. NIKE sells active sports apparel that covers most of these categories, athletically inspired lifestyle apparel and others.

FINANCIAL SNAPSHOT

Sales/Revenue: $10,697,000,000 (TTM)

Market Capitalization: $16,613,750,000

Industry Ranked: Number One (Market Capitalization)

Number One (Sales)

Fundamental Analysis:

Equity Valuation

|Ratio |Company |Industry |Sector |Market |Comparison |

|DDM |$6.62[1] | | | |Based on the DDM, NIKE’s stock intrinsic value |

| | | | | |is $6.62. NIKE’s stock is presently trading at |

| | | | | |$63.90. This would suggest that the price of |

| | | | | |NIKE’s stock is significantly overvalued |

| | | | | |compared to its intrinsic value. |

|P/E |21.55 |20.33 |19.16 |24.79 |P/Eco>P/EInd and P/ESec |

| | | | | |NIKE’s P/E Ratio is slightly higher than the |

| | | | | |industry and the sector indicating that the |

| | | | | |company is slightly overvalued. |

|PEG |7.81 |7.08 |3.07 |3.73 |PEGco > PEGInd and PEGSec. |

| | | | | |NIKE is overvalued. |

|PSR |1.55 |1.37 |1.15 |3.43 |PRSco > PSRInd and PSRSec |

| | | | | |NIKE’s PSR is less than 3, indicating the |

| | | | | |company is undervalued. |

|P/B |3.94 |3.56 |3.39 |4.28 |PBco>1 which indicates that the company is |

| | | | | |overvalued. |

|Beta |0.72 |0.75 |1.03 |1.00 |Betaco < 1. This stock is less risky compared |

| | | | | |to stocks in this industry and sector. |

Conclusion of Equity Valuations:

NIKE’s P/E, PSR and P/B of 21.55, 1.55, and 3.94 are quite similar to the averages of its industry and sector. Hence, NIKE can be considered to be fairly valued. However, based on the DDM model, NIKE’s stock price of $63.90 is significantly overvalued compared to its intrinsic value of $6.62.

B- Financial Strength Analysis

|Category |Ratio |Company |Industry |Sector |Market |Comparison |

|1- |5 years Growth of |2.29% |4.19% |8.14% |9.72% |The sales growth of NIKE is |

|GROWTH |Sales | | | | |lower compared to the industry|

|RATE | | | | | |and sector averages. |

| |5 years Growth of |15.34% |14.80% |6.01% |10.38% |The EPS growth of NIKE is |

| |EPS | | | | |higher compared to the |

| | | | | | |industry and sector averages. |

Growth of Sales

[pic]

Interpretation:

NIKE’s 5 year sales growth has declined substantially from 2000 to 2002. In 2002, its 5 year sales growth was lower than its industry average.

Growth of EPS

[pic]

Interpretation:

NIKE’s 5 year EPS growth has been on a downward trend, and its 2002 figure was in negative territory. Moreover, its industry average was much higher than NIKE’s 5 year EPS growth in 2002.

|Category |Ratio |Company |Industry |Sector |Market |Comparison |

|2- |Operating Margin |13.81% |12.52% |11.03% |18.91% |The Operating Profit margin |

|PROFITABILITY | | | | | |of NIKE is higher than the |

| | | | | | |industry and sector averages.|

| |Net Profit Margin |7.18% |6.64% |4.79% |11.73% |The Net Profit margin of NIKE|

| | | | | | |is higher than the industry |

| | | | | | |and sector averages. |

Operating Margin

[pic]

Interpretation:

This chart shows NIKE’s operating margin was higher than the industry average in 2002. In 2002, NIKE’s operating margin rebounded from a decline it experienced in 2001.

Net Profit Margin

[pic]

Interpretation:

After a decline in net margin for NIKE in 2001, its net margin increased substantially in 2002, and is close to its industry average.

|Category |Ratio |Company |Industry |Sector |Market |Comparison |

|3- |ROI |16.71% |16.12% |8.49% |9.64% |The return on investment of NIKE |

|MANAGEMENT | | | | | |is slightly higher than the |

|EFFECTIVENESS | | | | | |industry average but almost twice |

| | | | | | |its sector average. |

| |ROE |20.12% |19.15% |16.12% |17.86% |The return on equity of NIKE is |

| | | | | | |higher than the industry and |

| | | | | | |sector averages. |

Return on Equity

[pic]

Interpretation:

NIKE’s ROE has been stagnant from 2000 to 2002, and its ROE was lower than the industry average in 2002.

|Category |Ratio |Company |Industry |Sector |Market |Comparison |

|4- |Inventory Turnover |4.37x |4.41x |9.25x |9.96x |The inventory turnover of NIKE is lower|

|EFFICIENCY RATIO | | | | | |than the industry and sector averages. |

| | | | | | |This indicates that NIKE inventory |

| | | | | | |turnover is slower compared to those in|

| | | | | | |its industry and sector. |

| |Asset Turnover |1.67x |1.76x |1.19x |0.93x |The asset turnover of NIKE is lower |

| | | | | | |than the industry average but higher |

| | | | | | |than the sector average. This indicates|

| | | | | | |that the company does not utilize its |

| | | | | | |assets as well as those in its industry|

| | | | | | |but they do utilize its assets better |

| | | | | | |if compared to the sector. |

Inventory Turnover

[pic]

Interpretation:

After declining slightly in 2001, there was a sharp upturn in NIKE’s inventory turnover in 2002.

Asset Turnover

[pic]

Interpretation:

NIKE’s asset turnover was very flat from 2000 to 2002. Moreover, its asset turnover was lower than its industry average in 2002.

|Category |Ratio |Company |Industry |Sector |Market |Comparison |

|5- |Total Debt/Equity |0.23x |0.22x |4.03x |0.98x |The debt/equity ratio of NIKE|

|DEBT RATIO | | | | | |is comparable to its industry|

| | | | | | |average. This indicates that |

| | | | | | |NIKE is as leveraged as those|

| | | | | | |in its industry. However, the|

| | | | | | |debt/equity ratio of NIKE is |

| | | | | | |lower than its sector |

| | | | | | |average, indicating that NIKE|

| | | | | | |is not as leveraged as those |

| | | | | | |in its industry. |

| |Interest Coverage |28.54x |25.33x |8.68x |12.96x |The interest coverage ratio |

| | | | | | |of NIKE is higher than the |

| | | | | | |industry and sector averages.|

| | | | | | |This indicates that NIKE can |

| | | | | | |meet its fixed obligations |

| | | | | | |much better than those in its|

| | | | | | |industry and sector. |

Debt/Equity

[pic]

Interpretation:

NIKE’s debt to equity ratio has increased in 2002, after a decline in 2001. However, NIKE is still below its industry average as far as its leverage is concerned.

|Category |Ratio |Company |Industry |Sector |Market |Comparison |

|6- |Quick Ratio |1.52x |1.76x |1.26x |1.26x |The quick ratio of NIKE is |

|LIQUIDITY RATIO | | | | | |lower than the industry |

| | | | | | |average, but higher than its|

| | | | | | |sector average. This |

| | | | | | |indicates that NIKE is less |

| | | | | | |liquid than those in its |

| | | | | | |industry, but it is more |

| | | | | | |liquid than those in its |

| | | | | | |sector. |

| |Current Ratio |2.48x |2.94x |2.16x |1.76x |The current ratio of NIKE is|

| | | | | | |higher than the sector |

| | | | | | |averages, but lower than the|

| | | | | | |industry average. This |

| | | | | | |indicates that NIKE is more |

| | | | | | |liquid than those in its |

| | | | | | |sector, but it is less |

| | | | | | |liquid than those in its |

| | | | | | |industry. |

Quick Ratio

[pic]

Interpretation:

NIKE’s quick ratio has been increasing steadily from 2000 to 2002 although its figure in 2002 was still lower than its industry average.

Current Ratio

[pic]

Interpretation:

The current ratio of NIKE has been slowly increasing from 2000 to 2002. However, its current ratio in 2002 was slightly lower than its industry average.

Conclusion of Financial Strength Analysis:

NIKE scores better than the industry and sector averages in the following factors (twelve trailing months): 5 year EPS growth (15.34%), operating margin (13.81%), ROI (16.71%), ROE (20.12%), and interest coverage (28.54%) ratios. NIKE is a world leader in footwear and proves to be very competitive within its industry and its sector posting results that are slightly higher than its industry and sector averages in several areas.

Technical Analysis:

1-Relative Strength Index:

The Relative Strength Index ("RSI") is a popular oscillator. The name "Relative Strength Index" is slightly misleading as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal. Movements above 70 are considered overbought, while an oversold condition would be a move under 30.

Figure 1: Nike

_1year price chart

[pic]

Interpretation:

NIKE’s RSI is at the 60 level. This would indicate a HOLD position for NIKE.

Figure 2: Nike compared to the Market

_1year price chart

[pic]

Interpretation:

In figure 2, NIKE’s price movement has quite similarly followed the trend of the market the last 12 months. However, they are currently outperforming the market. Although the market trend seems to be taking an upward turn, NIKE stock seems to be overbought. This verifies that it is not a good time to buy.

Figure 3: Nike compared to Puma

1year price chart

[pic]

Interpretation:

Figure 3 illustrates that PUMA has outperformed NIKE for the last 12 months. I will still maintain a HOLD position on NIKE.

2-Bollinger Bands:

Bollinger Bands are similar to moving average envelopes. The difference between Bollinger Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods.Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an indicator. These comments refer to bands displayed on prices. As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices.

Figure 1: Nike

_1year price chart

[pic]

Interpretation:

NIKE currently falls within the Bollinger Band. This indicates that the stock is neither positively nor negatively extended. Since the Bollinger Band widths are not very wide, this indicates that there is not much volatility in the price of the stock. However, since NIKE falls within the Bollinger Band, this indicates a time to HOLD the stock since there is great potential for price growth.

Figure 2: Nike compared to the Market

1year price chart

[pic] _

Interpretation:

NIKE and the market seem to have a close historical trend. Recent performance indicates that the market is heading upwards. This indicates that it is opportune time to BUY NIKE. However, I will still maintain a HOLD on the NIKE stock.

Figure 3: Nike compared to Puma

_1year price chart

[pic]

Interpretation:

Figure 3 shows that NIKE’s stock is not as volatile as PUMA’s stock. Due to the fact that NIKE’s stock presently falls within the Bollinger Band, this indicates a time to HOLD the stock since there is great potential for price growth.

3- Simple Moving Average:

A Moving Average is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down.

There are five popular types of moving averages: simple (also referred to as arithmetic), exponential, triangular, variable, and weighted. Moving averages can be calculated on any data series including a security's open, high, low, close, volume, or another indicator. A moving average of another moving average is also common.

The only significant difference between the various types of moving averages is the weight assigned to the most recent data. Simple moving averages apply equal weight to the prices. Exponential and weighted averages apply more weight to recent prices. Triangular averages apply more weight to prices in the middle of the time period. And variable moving averages change the weighting based on the volatility of prices.

The most popular method of interpreting a moving average is to compare the relationship between a moving average of the security's price with the security's price itself. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average.

Figure 1: Nike

_1year price chart

[pic]

Interpretation:

Since the closing prices of NIKE in the last few days are slightly above the SMA line, there is an indication to BUY at this time.

Figure 2: Nike compared to the Market

_1year price chart

[pic]

Interpretation:

A BUY signal was triggered when the market average was heading upwards. Moreover, NIKE’s stock has been hovering above the SMA line in the last few trading sessions.

Figure 3: Nike compared to Puma

_1year price chart

[pic]

Interpretation:

It is an opportune time to BUY NIKE’s stock because its stock is trading above the SMA line, and its stock has not appreciated much compared to PUMA’s stock.

4-Volume Analysis:

The Cumulative Volume Index ("CVI") is a market momentum indicator that shows whether money is flowing into or out of the stock market. It is calculated by subtracting the volume of declining stocks from the volume of advancing stocks, and then adding this value to a running total.

The CVI and OBV (On Balance Volume) are quite similar. Many computer programs and investors incorrectly call the OBV the CVI. OBV, like the CVI, was designed to show if volume is flowing into or out of the market. But, because up-volume and down-volume are not available for individual stocks, OBV assumes that all volume is up-volume when the stock closes higher and that all volume is down-volume when the stock closes lower. The CVI does not have to make this large assumption, because it can use the actual up- and down-volume for the New York Stock Exchange.

One useful method of interpreting the CVI is to look at its overall trend. The CVI shows whether there has been more up-volume or down-volume and how long the current volume trend has been in place. Also, look for divergences that develop between the CVI and a market index. For example, is the market index making a new high while the CVI fails to reach new highs? If so, it is probable that the market will correct to confirm the underlying story told by the CVI.

Figure 1: NIKE

_1year price chart

[pic]

Interpretation:

There was heavy trading on NIKE’s stock in the months of July and September. The volume has since decreased substantially. Place a HOLD on NIKE.

Figure 2: NIKE compared to the market

_1year price chart

[pic]

Interpretation:

In figure 2, NIKE stock seems to be overbought in relation to the market index. As a contrarian, it is better to HOLD on to NIKE stock since it is a bit overvalued at this point. The volume index of NIKE is not rising in relation to the Market index. This indicates that the number of investors of the stock is decreasing. This verifies that it is not the best time to buy the stock because the demand for the stock is not strong. Place a HOLD on the stock.

Figure 3: NIKE compared to PUMA

_1year price chart

[pic] Interpretation:

The price movement of NIKE’s stock in the last six months suggests that they have underperformed in comparison to PUMA’s stock. There seems to be a strong resistance in the upward momentum of NIKE’s stock. NIKE’s volume has been quite inconsistent in the last 6 months. There was a huge spike in volume at the end of June and in the middle of September. Unless there is a substantial increase in volume, I would place a HOLD on NIKE.

Conclusion of the Technical Analysis:

Out of the four technical indicators, 3 have indicated a HOLD on NIKE and 1 has indicated a BUY on NIKE. Final technical analysis: Place a HOLD on NIKE.

Leading Economic Indicator Analysis

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Interpretation

The US economy seems to be recovering from its slowdown. The 3rd Quarter GDP expanded at a 7.2% rate.

[pic]

Interpretation

The forecast for the stock market in the next few months is good because companies have reported 7 consecutive earnings growth quarters. In third quarter of this year, companies on average reported a whopping earnings growth rate of 21.8%.

[pic]

Interpretation

Job growth in 2003 is very poor. However, there is an indication that the job market is slowly improving. Job growth is extremely important for the economy and subsequently the stock market because two thirds of the United States GDP comprised of consumers expenditure.

[pic]

Interpretation

Consumer confidence is important to the US economy because it accounts for about 66% of its economic activity. Consumer confidence in 2003 is still weak. Based on the graph above, consumer confidence will likely remain weak unless job growth improves significantly.

[pic]

Interpretation

The PPI for 2001 and 2003 has been very low. Based on the graph above, the PPI is likely to be in the range of 0 and 1 in the near future.

[pic]

Interpretation

The CPI for 2002 and 2003 has been very low. It is projected that the CPI will remain low for the next 6 months. The Federal Reserve will not raise the interest rate if the level of inflation is low. A higher interest rate will have a negative effect on the stock market.

Conclusion of economic indicator analysis:

Based on the six graphs above, the US economy has showed signs of growth and the stock market might experience a mild rally due to these factors. Companies are beginning to report positive earnings, and profits continue to improve. Another positive side is the low inflation rate judging by the PPI and CPI numbers. The US economy is anticipated to improve in the coming months.

Industry Analysis

10 Best Performing Industries

| Industry | % Change One Month |

|Packaging & Containers |14.6% |

|Sporting Goods Stores |14.4% |

|Semiconductor Equipment & Materials |14.3% |

|Textile - Apparel Clothing |13.9% |

|Processing Systems & Products |13.9% |

|Diagnostic Substances |13.7% |

|Jewelry Stores |13.6% |

|Computer Based Systems |13.1% |

|Copper |12.5% |

|Air Services, Other |12.0% |

10 Worst Performing Industries

| Industry | % Change One Month |

|Drugs - Generic |-13.1% |

|Sporting Activities |-13.1% |

|Drug Delivery |-11.0% |

|General Entertainment |-7.8% |

|Long Distance Carriers |-6.7% |

|REIT - Hotel/Motel |-6.0% |

|Oil & Gas Equipment & Services |-5.4% |

|Healthcare Information Services |-5.3% |

|Grocery Stores |-4.9% |

|Appliances |-4.7% |

Conclusion of industry analysis:

With the general improvement in the economy, the footwear industry is projected to benefit from the upside in the economy because people will have more disposable income to spend on non durable goods which is basically the footwear industry.

RECOMMENDATION:

Based on NIKE’s fundamental analysis, it is not a good to buy this stock aggressively. Based on a long term investment strategy, it is better to ACCUMULATE NIKE stock because of its potential for further growth and expansion, and also due to its cyclical nature. The technical analysis indicates that it is a good time to HOLD the stock at this point of time. I would recommend a “HOLD / ACCUMULATE” on NIKE stock.

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[1] Do = 0.56

Growth (5 year) = 0.0874

Ks = 12%

V = $6.62

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