Nike stock appears to be significantly overvalued

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– By GF value

Nike’s stock (NYSE: NKE, Finances over 30 years) appears to be significantly overvalued, according to the GuruFocus value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should trade. It is calculated based on the historical multiples at which the stock has traded, past business growth and analysts’ estimates of the company’s future performance. If a stock’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly lower than the GF value line, its future return is likely to be higher. At its current price of $133.26 per share and market capitalization of $210.5 billion, Nike stock appears to be significantly overvalued. The GF value for Nike is shown in the table below.

Nike stock appears to be significantly overvalued

Since Nike is significantly overvalued, the long-term return on its stock will likely be much lower than the future growth of its business, which has averaged 5% over the past three years and is expected to grow 8.89%. per year over the next three to five years. .

Link: These companies can offer higher future returns at reduced risk.

Companies with weak financial strength offer investors a high risk of permanent capital loss. To avoid a permanent capital loss, an investor should do their research and examine a company’s financial strength before deciding to buy stock. The two cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Nike has a cash-to-debt ratio of 0.98, which puts it in the middle of companies in the Manufacturing – Apparel & Accessories sector. Nike’s overall financial strength is 6 out of 10, indicating that Nike’s financial strength is fair. Here is Nike’s debt and cash flow over the past few years:

Nike stock appears to be significantly overvalued

Nike stock appears to be significantly overvalued

Investing in profitable businesses carries less risk, especially in businesses that have demonstrated consistent profitability over the long term. Generally, a company with high profit margins offers better performance potential than a company with low profit margins. Nike has been profitable 10 years in the last 10 years. Over the past 12 months, the company has posted revenue of $38.5 billion and earnings of $2.12 per share. Its operating margin of 10.87% is higher than that of 82% of companies in the Industry – Clothing & Accessories sector. Overall, GuruFocus rates Nike’s profitability as strong. Here is Nike’s revenue and net income for the past few years:

Nike stock appears to be significantly overvalued

Nike stock appears to be significantly overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely tied to the long-term performance of a company’s stock. The faster a company grows, the more likely it is to create value for its shareholders, especially if the growth is profitable. Nike’s 3-year CAGR is 5%, which ranks better than 72% of companies in the Industry – Apparel & Accessories sector. The average 3-year EBITDA growth rate is -6.3%, which is in line with the average for companies in the Industry – Clothing and Accessories sector.

Another way to assess a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on Invested Capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating shareholder value. Over the past 12 months, Nike’s ROIC was 19.39, while its WACC was 6.39. Nike’s historic ROIC vs WACC comparison is shown below:

Nike stock appears to be significantly overvalued

Nike stock appears to be significantly overvalued

In summary, Nike (NYSE:NKE, 30-year Financials) stock would be significantly overvalued. The company’s financial situation is correct and its profitability is solid. Its growth ranks among the average companies in the Manufacturing – Apparel & Accessories industry. For more on Nike stock, you can view its 30-year financial statements here.

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This article first appeared on GuruFocus.

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