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-333375-257175Ticker:NKESector:Consumer GoodsIndustry: Textile- Apparel Footwear and Accessories Recommendation: BUYPricingClosing Price$75.58(4/19/10)52-wk High$76.00(4/19/10)52-wk Low$48.76(4/19/10)Beta 0.92Dividend1.08Market DataMarket Cap$36.71BValuationEPS (ttm)$3.51P/E (ttm)21.55Profitability & Effectiveness (ttm)ROA11.88%ROE19.57%Profit Margin9.26%Oper. Margin13.17%Analyst:Patrick Roachpkrbnd@mail.missouri.edu JOHN LOTHMANjdlrzf@mizzou.edu00Ticker:NKESector:Consumer GoodsIndustry: Textile- Apparel Footwear and Accessories Recommendation: BUYPricingClosing Price$75.58(4/19/10)52-wk High$76.00(4/19/10)52-wk Low$48.76(4/19/10)Beta 0.92Dividend1.08Market DataMarket Cap$36.71BValuationEPS (ttm)$3.51P/E (ttm)21.55Profitability & Effectiveness (ttm)ROA11.88%ROE19.57%Profit Margin9.26%Oper. Margin13.17%Analyst:Patrick Roachpkrbnd@mail.missouri.edu JOHN LOTHMANjdlrzf@mizzou.edu Overview:Nike’s principal business activity is the design, development and worldwide marketing of high quality footwear, apparel, equipment, and accessory products. NIKE is the largest seller of athletic footwear and athletic apparel in the world. They sell their products to retail accounts, through NIKE-owned retail including stores and internet sales, and through a mix of independent distributors and licensees, in over 170 countries around the world. Virtually all of their products are manufactured by independent contractors. Virtually all footwear and apparel products are produced outside the United States, while equipment products are produced both in the United States and abroad.Recommendation: I believe that this company is a BUY. The company has a long operating history, with a loyal customer base, as well as high growth rates projected for the future. There are many reasons why we should buy Nike. Shares of Nike recently hit all-time highs following solid quarterly earnings. Analysts say that Nike has continued to take market share from Adidas and Under Armour. The company has benefited from improving trends across the board, and with strong orders for future delivery, many investors expect the good times to continue. Nike has methodically fostered its image over the years and developed a killer brand that is well-known around the world. Its endorsements from some of the top athletes in major sports, like basketball's LeBron James and golf's Tiger Woods, should keep the brand strong, and many investors see this as a key quality to have in a long-term holding.?Nike's strong balance sheet has helped it weather the downturn and remain focused on growth. The company has pulled in positive free cash flow in recent years, and with minimal debt on the books compared with about $4 billion in cash, many CAPS members think Nike can still thrive.Products: Everyone knows the products that Nike sells. Nike sells shoes mainly used for athletic use but also for causal and leisure use. Nike also sells sports apparel and accessories. They have a wholly-owned subsidiary, Cole Haan (“Cole Haan”), headquartered in Yarmouth, Maine, designs and distributes dress and casual footwear, apparel and accessories for men and women under the brand names Cole Haan ? and Bragano ?.Another wholly-owned subsidiary, Converse Inc. (“Converse”), headquartered in North Andover, Massachusetts, designs, distributes, and licenses athletic and casual footwear, apparel and accessories under the Converse ? , Chuck Taylor ? , All Star ? , One Star ? , and Jack Purcell ? trademarks. A wholly-owned subsidiary, Hurley International LLC (“Hurley”), headquartered in Costa Mesa, California, designs and distributes a line of action sports apparel for surfing, skateboarding, and snowboarding, youth lifestyle apparel, and accessories under the Hurley ? trademark. The final wholly-owned subsidiary, Umbro Ltd. (“Umbro”), headquartered in Manchester, England, designs, distributes and licenses athletic and casual footwear, apparel and equipment, primarily for the sport of soccer, under the Umbro ? trademarks. United States Market:In fiscal 2009, sales in the United States including U.S. sales of Other businesses accounted for approximately 42% of total revenues, compared to 43% in fiscal 2008 and 47% in fiscal 2007. During fiscal 2009, the three largest customers accounted for approximately 25% of sales in the United States. They utilize 20 NIKE sales offices to solicit sales in the United States. They also utilize 5 independent sales representatives to sell specialty products for golf, and 3 for skateboarding and outdoor products. In addition, they sell NIKE brand products through the internet website, , and they operate the following retail outlets in the United States: ? U.S. Retail Stores ?? Number NIKE factory stores (which carry primarily overstock and close-out merchandise) ?? 140 NIKE stores (including one NIKE Women store) ?? 16 NIKETOWNs (designed to showcase NIKE products) ?? 11 NIKE employee-only stores ?? 3 Cole Haan stores (including factory stores) ?? 111 Converse factory stores ?? 43 Hurley stores (including factory and employee stores) ?? 14 ?? ? Total ?? 338 ?? ? International Market:In fiscal 2009, non-U.S. sales (including non-U.S. sales of our Other businesses) accounted for 58% of total revenues, compared to 57% in fiscal 2008 and 53% in fiscal 2007. They sell their products to retail accounts, through NIKE-owned retail stores, and through a mix of independent distributors and licensees around the world. They estimate that they sell to more than 28,000 retail accounts outside the United States, excluding sales by independent distributors and licensees. They operate 14 distribution centers outside of the United States. NIKE’s three largest customers outside of the U.S. accounted for approximately 11% of total non-U.S.?sales. They operate the following retail outlets outside the United States: ? Non-U.S. Retail Stores ?? Number NIKE factory stores ?? 184 NIKE stores ?? 61 NIKETOWNs ?? 4 NIKE employee-only stores ?? 12 Cole Haan stores ?? 74 Hurley stores ?? 1 ?? ? Total ?? 336 Product Research and DevelopmentI believe their research and development efforts are a key factor in their past and future success. Technical innovation in the design of footwear, apparel, and athletic equipment receive continued emphasis as NIKE strives to produce products that help to reduce injury, enhance athletic performance and maximize comfort. In addition to NIKE’s own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design and related fields, they also utilize research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and other experts who consult with us and review designs, materials and concepts for product improvement. Employee athletes, athletes engaged under sports marketing contracts and other athlete’s wear-test and evaluate products during the design and development process. SWOT AnalysisStrengthsNike is a very competitive organization. Phil Knight (Founder and CEO) is often quoted as saying that 'Business is war without bullets.' Nike has a healthy dislike of its competitors. At the Atlanta Olympics, Reebok went to the expense of sponsoring the games. Nike did not. However Nike sponsored the top athletes and gained valuable coverage.Nike has no factories. It does not tie up cash in buildings and manufacturing workers. This makes a very lean organization. Nike is strong at research and development, as is evidenced by its evolving and innovative product range. They then manufacture wherever they can produce high quality product at the lowest possible price. If prices rise, and products can be made more cheaply elsewhere (to the same or better specification), Nike will move production.Nike is a global brand. It is the number one sports brand in the World. Its famous 'Swoosh' is instantly recognizable, and Phil Knight even has it tattooed on his ankle.WeaknessThe organization does have a diversified range of sports products. However, the income of the business is still heavily dependent upon its share of the footwear market. This may leave it vulnerable if for any reason its market share erodes.The retail sector is very price sensitive. Nike does have its own retailer in Nike Town. However, most of its income is derived from selling into retailers. Retailers tend to offer a very similar experience to the consumer. Can you tell one sports retailer from another? So margins tend to get squeezed as retailers try to pass some of the low price competition pressure onto Nike.OpportunitiesProduct development offers Nike many opportunities. The brand is fiercely defended by its owners whom truly believe that Nike is not a fashion brand. However, like it or not, consumers that wear Nike product do not always buy it to participate in sport. Some would argue that in youth culture especially, Nike is a fashion brand. This creates its own opportunities, since product could become unfashionable before it wears out i.e. consumers need to replace shoes.There is also the opportunity to develop products such as sport wear, sunglasses and jeweler. Such high value items do tend to have associated with them, high profits.The business could also be developed internationally, building upon its strong global brand recognition. There are many markets that have the disposable income to spend on high value sports goods. For example, emerging markets such as China and India have a new richer generation of consumers. There are also global marketing events that can be utilized to support the brand such as the World Cup (soccer) and The Olympics.Threats Nike is exposed to the international nature of trade. It buys and sells in different currencies and so costs and margins are not stable over long periods of time. Such an exposure could mean that Nike may be manufacturing and/or selling at a loss. This is an issue that faces all global brands.The market for sports shoes and garments is very competitive. The model developed by Phil Knight in his Stamford Business School days (high value branded product manufactured at a low cost) is now commonly used and to an extent is no longer a basis for sustainable competitive advantage. Competitors are developing alternative brands to take away Nike's market share.As discussed above in weaknesses, the retail sector is becoming price competitive. This ultimately means that consumers are shopping around for a better deal. So if one store charges a price for a pair of sports shoes, the consumer could go to the store along the street to compare prices for the exactly the same item, and buy the cheaper of the two. Such consumer price sensitivity is a potential external threat to petitorsDIRECT COMPETITOR COMPARISON?Competitors: Nike is the industry leader and has the biggest market share. Their closest competitor is Adidas and even they are far away from them in market cap. Nike is a very strong company and their competitors enjoy the little market share that they do have.?Performance over the past 1 year compared to competitors: HLYS, SKX, BOOT, ADDYY, KSWS, DECK, CROX, and the S&P500. Over the past year Sketchers and Crocs have the largest growth.Stock price change over the past 6 months: Over the past 6 months Sketchers has performed the best. Nike still is performing better than the S&PValuation: For my valuation I used the Warren Buffett Owner Earnings Model to calculate my intrinsic value of Mattel. I used a beta of 0.9290 Day T-Bill: .147% Market Return: 10%K = Rf + β(Rm-Rf)K = .00147 + 0.92(.1000-.00147)K = 9.21% DiscountInstead of using the 9.21%, I just used 10%. For 2010, I used a growth rate of 1.0%. This is what analyst are projecting. Fiscal year for 2009 gets released in early may. In 2011, I used a growth rate of 12.6%. In 2012 I used a 12.0% growth rate. For years 2013-2015 I used a growth rate of 8%.In years 2016 through 2019 I used a 7% growth rate. I believe these growth rates are very conservative. After 2010, analyst are predicting average growth rates of 12% for the following 5 years. I was very conservative with my growth rates. After conducting my discounted cash flow valuation I came up with an intrinsic value of $83.31 which is significantly above the closing price of $75.58(as of 4/16/2010). The stock is undervalued. I feel that the stock is worth purchasing and would be a great asset for our portfolio. Sensitivity AnalysisFirst Stage Growth RatesDiscount Rate6%8%10%12%8%$142.77$169.55$201.01$237.8710%$72.60$85.08$99.68$116.6512%$49.34$57.14$66.20$76.7114%$37.76$43.28$49.66$57.02The intrinsic value for NKE is $83.31 how I calculated it. The sensitivity analysis above shows various discount rates and first stage growth rates. I was very conservative on the growth rates I feel like. Analysts are predicting various growth rates for each year so it was hard to classify what numbers to use. I feel like the 12 and 14% discount rate are improbable but I included them just for a comparison. So for the 8 and 10% discount rate the intrinsic value is in all but one case above the stock price. Still in most cases the analysis shows that the stock is still underpriced in most situations. Stock Price vs. S&P 1 year: Stock Price vs. S&P 6 months:Wall Street Analysts’ Opinions:Financial Statements ................
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