Case 2
MBA 614 4.BB

3/12/2015

NIKE INC.
Share price and Investment valuation

Mashada Kamal

Steven Ricciardi

7393091

6043569

Case 2
NIKE INC valuation

A. Investment Decision
In our opinion, North Point should take a position in Nike at current market price of
$42.09 since it is undervalued by $2.01 according to CAPM. Furthermore, NIKE INC stock has low-risk and promising growth prospects based on financial statement analysis and historical P/E analysis.
In order to reach the above decision we have evaluated NIKE Inc. from both market and company perspective. Our market analysis included estimating target share price of NIKE whereas company analysis included evaluating the NIKE’s past financial performance (ratio analysis) to set future expectations. Market analysis
We recommend buying NIKE’s share after evaluating its market position by estimating target share price and NIKE’s historical P/E performance against S&P 500. We estimated target share price by calculatingi.

The Weighted Average Cost of Capital (WACC) of NIKE Inc.

ii.

The expected price per share based on NIKE WACC.

iii.

Comparing expected price per share with current market price.

A snapshot of our analysis is presented below. Details of each method is discussed following this section.
Table 1

Snapshot of Stock pricing of NIKE
Current Market

Price

P/E

(What it is now)

42.09

19.4

Estimated target

Price per share as of Jul 05 2001

P/E

WACC

How much better can it get (DDM historical)

57.02

26.25

6.69%

What it should be (CAPM)

44.10

20.30

9.86%

How much worse can it get (DDM constant growth)

33.37

15.36

13.43%

We used DDM methods to set the possible range of share price attainable by NIKE in the market under loose assumptions of DDM. The historical DDM approach suggested the most optimistic share value
($59.37) whereas constant growth model of DDM assumes more conservative approach to give lowest attainable share price ($33.72) based on current market sentiments. Nevertheless, our CAPM method gives the most accurate value of expected share price ($44.10) which lies between the DDM ranges and it indicates what the market price should have been for NIKE. Since the current market price of $42.09 is lower than what is estimated using CAPM, we believe the share price is currently undervalued by at least
4.8% (or $2.01 per share).

P/E Multiplier Effect on Stock Target
It is important to note that the historically from 1991-2000 the average NIKE P/E was 89% that of the S&P
500 and several of the times outperformed S&P 500 (table 2). However, at the target price of $44.10
(based on CAPM), the expected NIKE P/E of 20.30 is slightly higher than the current NIKE P/E of 19.4, but significantly lower than the current S&P 500 P/E of 33.28 i.e. only 57%. This indicates probable market undervaluation of NIKE shares and substantial growth potential for P/E. At the average 10-year
P/E relative to S&P 500, NIKE should have a P/E of 29.61 (compared to the current S&P 500 P/E of
33.28). Solely using this figure would value NIKE stock beyond the upper bracket defined by DDM
Historical (P/E 26.25), but nonetheless our historical P/E analysis only provides optimism regarding stock price and suggests a target value above CAPM (but below DDM Historical).
Table 2
Historical P/E Ratios
Year

NIKE

S&P 500

Nike / S&P

2001

19.03*

33.28**

57%

2000

20.83

28.02

74%

1999

38.46

33.46

115%

1998

33.93

29.10

117%

1997

21.03

21.83

96%

1996

26.66

19.21

139%

1995

14.38

15.82

91%

1994

14.60

17.63

83%

1993

15.78

23.31

68%

1992

13.65

23.94

57%

1991
AVERAGE

10.34
20.97

19.12
23.14

54%
89%

Nike P/E @
89% of S&P P/E
*As of May 31 2001
** As of Q2 2001
Sources: Ycharts.com

29.62

NIKE Financial performance analysis
While market analysis suggests probable undervaluation of NIKE shares making it a good-buy for North
Point, however, we also conducted ratio analysis to understand the underlying company performance that should drive