Advertisement
Australia markets closed
  • ALL ORDS

    8,416.60
    -57.70 (-0.68%)
     
  • ASX 200

    8,150.00
    -55.20 (-0.67%)
     
  • AUD/USD

    0.6799
    -0.0045 (-0.65%)
     
  • OIL

    74.45
    +0.74 (+1.00%)
     
  • GOLD

    2,673.20
    -6.00 (-0.22%)
     
  • Bitcoin AUD

    90,975.68
    +1,312.21 (+1.46%)
     
  • XRP AUD

    0.78
    +0.01 (+1.85%)
     
  • AUD/EUR

    0.6190
    -0.0007 (-0.12%)
     
  • AUD/NZD

    1.1031
    +0.0024 (+0.22%)
     
  • NZX 50

    12,619.94
    +47.28 (+0.38%)
     
  • NASDAQ

    20,035.02
    +241.67 (+1.22%)
     
  • FTSE

    8,280.63
    -1.89 (-0.02%)
     
  • Dow Jones

    42,352.75
    +341.16 (+0.81%)
     
  • DAX

    19,120.93
    +105.52 (+0.55%)
     
  • Hang Seng

    22,736.87
    +623.36 (+2.82%)
     
  • NIKKEI 225

    38,635.62
    +83.56 (+0.22%)
     

Are NIKE, Inc. (NYSE:NKE) Investors Paying Above The Intrinsic Value?

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, NIKE fair value estimate is US$64.00

  • Current share price of US$79.80 suggests NIKE is potentially 25% overvalued

  • Our fair value estimate is 30% lower than NIKE's analyst price target of US$91.26

Today we will run through one way of estimating the intrinsic value of NIKE, Inc. (NYSE:NKE) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for NIKE

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$4.52b

US$4.95b

US$4.94b

US$4.97b

US$5.03b

US$5.11b

US$5.20b

US$5.31b

US$5.42b

US$5.54b

Growth Rate Estimate Source

Analyst x9

Analyst x9

Analyst x4

Est @ 0.58%

Est @ 1.16%

Est @ 1.56%

Est @ 1.84%

Est @ 2.04%

Est @ 2.18%

Est @ 2.27%

Present Value ($, Millions) Discounted @ 7.2%

US$4.2k

US$4.3k

US$4.0k

US$3.8k

US$3.6k

US$3.4k

US$3.2k

US$3.0k

US$2.9k

US$2.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$35b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.2%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$5.5b× (1 + 2.5%) ÷ (7.2%– 2.5%) = US$122b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$122b÷ ( 1 + 7.2%)10= US$61b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$96b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$79.8, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at NIKE as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.2%, which is based on a levered beta of 1.135. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for NIKE

Strength

  • Earnings growth over the past year exceeded its 5-year average.

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Earnings growth over the past year underperformed the Luxury industry.

  • Dividend is low compared to the top 25% of dividend payers in the Luxury market.

Opportunity

  • Annual earnings are forecast to grow for the next 3 years.

  • Good value based on P/E ratio compared to estimated Fair P/E ratio.

Threat

  • Annual earnings are forecast to grow slower than the American market.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For NIKE, we've put together three important items you should further examine:

  1. Financial Health: Does NKE have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does NKE's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.