Nike stock: Is there more room to run upwards?

In the past, the Nike stock has helped its shareholders achieve incredible price gains. At the time of the IPO in 1980, the stock was issued at USD 22. Today one stock costs almost 100 USD, although 7 stock splits have been done in the meantime. This means that whoever bought a Nike stock at 22 USD at the time of the IPO now owns 128 shares and each of these shares is worth almost five times more now. But even late entrants were rewarded. The amount invested 10 years ago, has now increased six-fold when including dividends.

							

								
									
										
									
								
							
		
							

								
							
							
						
								
							
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With targeted advertising using celebrity athletes, Nike is winning many customers. Nike is able to charge premium prices for its products by binding customers to their products. This generates high and rising profits. In the last 10 years, Nike has doubled its sales.

Nike stock
Logo
Country	USA
Industry	Textiles & Apparel
Isin	US6541061031
Market cap.	152,4 billion $
Dividend yield	1,0%
Dividend stability	0,95 of max. 1.0
Earnings stability	0,90 of max. 1.0

However, Nike is suffering from the negative effects of the Corona pandemic. At the bottom of the stock market crash in March this year, the stock had lost a third of its value. By now, the price has recovered to the pre-crisis level. However, turnover has still not recovered. Recently, Nike presented disappointing figures for the last quarter. Sales plummeted by 38 percent. Rising sales in online shopping were only able to slow down the decline, but could not stop it, resulting in a quarterly loss. The figures show that Nike, like many companies in the retail sector, is struggling with the consequences of the Corona pandemic. It is therefore questionable why the stock price has recovered so quickly. This analysis will show you how the Corona pandemic is affecting Nike´s business and whether the stock is still a buy at the current price level.

The business model: How Nike earns cash

Nike is a manufacturer of footwear, apparel, and sports equipment, which are developed and produced by over one million workers in more than 500 factories in 41 countries worldwide. The products are sold directly to consumers and retailers. The company is the world’s largest manufacturer of athletic shoes and apparel.

World map of Nike factories (Source: http://manufacturingmap.nikeinc.com)

The USA is the most important market for Nike, accounting for 41 percent of sales. Followed by Europe, Middle East and Africa with 25 percent. China accounted for 16 percent of sales in 2019. The rest of Asia and Latin America generate 13 percent of sales. The remaining percentage is contributed by the subsidiary “Converse”.

Sales are spread very unequally among the product categories. 66 percent of sales are generated with footwear, where Nike also has its origins. Clothing is responsible for almost 30 percent of sales. In contrast, the “equipment” segment generates just under 4 percent of sales. Nike is primarily a manufacturer of footwear, though sports equipment is almost negligible.

Revenues of Nike by segment (Source: FactSet Workstation)

Since sports equipment is subject to high physical strain, it must be replaced regularly. In addition, Nike also makes many items specifically for children that need to be bought new as they grow out of them. This gives Nike a very stable business model with regular income. Normally, this makes Nike less dependent on economic cycles than ordinary textile manufacturers. You can also see this from the fact that Nike’s profits only fell slightly in the year following the financial crisis (see chart below). With the Corona pandemic, however, Nike has now revealed a weakness. When sporting events are cancelled and stores are closed, even independence from the economic cycle is no longer helpful. Nike has already had to report a 38 percent drop in sales in the last quarter. For the entire 2020 calendar year, the result will most likely be significantly worse than last year. Still, you should look past that fact. The Corona crisis will be followed by prosperous years and then, in my opinion, Nike will also pick up speed again.

Nike is increasingly using the Internet as a distribution channel. In the third quarter of the fiscal year 2020, Nike achieved just under 14 percent of its sales online, with growth rates of over 30 percent. A very positive development. Not only because the margins are higher for direct sales than for sales to middlemen, but also because the Internet can cushion sales losses due to store closures during the Pandemic.

How profitable is Nike?

Between 2010 and 2019, Nike has substantially increased its profits. Earnings per share more than doubled during this period. At the same time, revenues also doubled. As a result, the dividend could be tripled in the same period. This increase is not only due to organic sales growth but also due to share buybacks, on which Nike spends a lot of money. In recent years, Nike has spent about three times as much money on share buybacks as it has spent on dividends. In 1993, the number of Nike shares outstanding was almost 2.5 million. Today, there are just over 1.5 million shares left. Due to the shrinking number of shares, the earnings per share increased artificially. In the last years between 3 and 7 US cents per year.

The amount of Nike´s shares outstanding is shrinking constantly

In this case, the repurchased shares do not appear in the statistics on Dividendstocks.cash because Nike does not keep the repurchased shares on its balance sheet but cancels them immediately.

Development of earnings, cash flow and dividend of the Nike stock

Growth costs money. Nike must spend large sums of money on advertising to attract new customers and promote new product lines. However, the company has managed to ensure that sales growth has not been achieved at the expense of profitability. Costs have grown at the same rate as sales, keeping the operating margin constant. Higher sales with a constant margin mean higher profits for you as a shareholder.

Development of revenues and the operating margin of Nike

Is Nike´s dividend safe?

Like almost all US companies, Nike pays a quarterly dividend and has managed to increase it for 17 consecutive years.

Nike Dividend History

For the entire year, you currently receive 0.96 USD per share. Although Nike has increased its dividend by an average of 14 percent annually over the last 10 years, this only corresponds to a dividend yield of about 1 percent. This is due to the high price increase of the Nike stock during this period. Over the last 10 years, the price has increased almost six-fold, while the dividend has “only” tripled. The price increase has thus outpaced the dividend increases. Since the dividend yield decreases as the price increases, this explains the low yield of only one percent. In the Dividend-Turbo, you can see that although dividends have increased, the dividend yield has fallen over the years.

Despite the dividend increases, the dividend yield of the Nike stock has been falling for years

Alarming debt increase

In Nike’s debt chart you can see a sharp increase in debt this year. Nike issued bonds worth 6 billion USD in March 2020. As a result, long-term debt has increased from 3.5 to 9.4 billion USD. By taking on additional debt, liquidity has been strengthened, which is particularly important in the Corona Pandemic in order to cope with a sales slowdown. The new debt was raised at various maturities, but all of them are long-term. The bond with the longest maturity will not mature until 2050. Another positive aspect is that Nike has very little short-term debt. Because Nike only has to finance its operating expenses, the risk of a liquidity bottleneck is low despite the pandemic.

Development of the indebtedness of Nike

With the cash surplus that Nike normally generates, the new debt can probably be repaid quickly after the pandemic. The 6 billion USD roughly correspond to the amortization power of 2-3 years. In my view, Nike should be able to reduce the debt without cutting back on dividends or investments.

Nike currently has nearly 9 billion USD in liquidity. In the last quarter the loss amounted to 790 million USD. The cash holdings would therefore still be sufficient for a very long time to compensate for the losses caused by the pandemic.

Amortization power and cash reserves of Nike

Since the Corona-restrictions have been relaxed in many countries and stores have reopened, I expect the following quarters to be better than the previous. The USA remains a cause for concern, however. Nike generates a large part of its sales there. If the situation in the US deteriorates further, this could have a negative impact on Nike’s earnings in the coming quarters. Nevertheless, I believe that Nike’s liquidity is sufficient to cope with this negative scenario. If necessary, the company still has additional options available, for example, a further reduction in advertising spending.

The dividend should therefore be safe. Assuming that the economic situation improves as expected next year. However, should a second wave with renewed lockdowns roll across the globe, Nike’s management may cut the dividend to protect the liquidity for safety reasons.

Is the Nike stock undervalued?

Nike is currently valued at a very high P/E ratio of 62. However, this value is not very meaningful because the P/E ratio has increased sharply as a result of the drop in profits in the current fiscal year. In a normal year, the P/E ratio would be lower. The dynamic stock valuation also indicates an overvaluation of the Nike stock. The stock price is currently about USD 100. The fair value dividend on the other hand is only 89 USD. The fair values for cash flow and profit are much lower, at only USD 45 and USD 48 respectively. I would use the fair values of dividend and profit to value the stock in this case. The cash flow of a company with a lot of inventory fluctuates strongly from year to year, which reduces the significance of individual years.

Dynamic valuation of the Nike stock

At this point, the argument that the fair values for profit and cash flow are not relevant this year is perfectly legitimate. The fair values are very low, as profit and cash flow have fallen this year as a result of the pandemic. Since 2020 is an exception rather than the rule, the fair values this year paint an excessively negative picture of Nike. However, the current price is also higher than last year’s fair values. In 2019 Nike earned high profits, which is why the fair values for 2019 are larger. Even those higher fair values for 2019 do not match the current stock price. In addition, even the expected fair values for the 2021 fiscal year remain well below the current price, despite a predicted recovery. From this point of view, the stock is too expensive to justify a purchase in my opinion.

Alternatives to the Nike stock

Although Nike is the number one sporting goods manufacturer, there are stocks of well-known competitors that are an alternative to the Nike stock. In Germany, the significantly older companies Adidas and Puma could be considered. In the USA, Lululemon Athletica and Under Armour are also available. ANTA Sports, based in Hong Kong, could also be interesting:

Alternative Investments for Nike 

Each of the alternatives listed here is fundamentally analyzed and valued on Dividendstocks.cash in the same way as Nike.

Conclusion: Nicke stock– no buy rating right now

Nike has built a solid position in the sporting goods industry through its established brands. The company is growing profitably, which has led to generous dividend increases. The Corona pandemic is hitting Nike harder than other companies because lockdowns and social distancing mean less demand for sports equipment. However, Nike’s management has taken measures to safeguard liquidity and will likely be able to ride out the negative consequences of the pandemic. As soon as the virus is defeated and the consequences of the lockdowns are overcome, sales and profits will rise again.

Unfortunately, the negative influences on the financial results are not priced in by the market. The stock price has regained its pre-crisis level, although Nike has seen a significant drop in sales and profits as a result of the pandemic. In my opinion, this is not justified. The stock was already generously valued before the pandemic. Therefore, I would have expected a decline in price due to the poor results in the current fiscal year. Due to the high valuation, the Nike stock is not an attractive buy at the moment in my view. Nevertheless, Nike is a promising long-term investment. You could therefore to put the stock on your wish list and try to make a move if the price drops.