Nike (NYSE:NKE, 30-year Financials) stock would be significantly overvalued, according to GuruFocus Value’s 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 $132.99 per share and market capitalization of $209.7 billion, Nike stock is believed to be significantly overvalued. The GF value for Nike is shown in the table below.
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 with 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. A company’s cash-to-debt ratio and interest coverage 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 5 out of 10, indicating that Nike’s financial strength is fair. Here is Nike’s debt and cash flow over the past few years:
It is less risky to invest in profitable businesses, especially those that have demonstrated consistent long-term profitability. A business with high profit margins is also generally a safer investment than a business with low profit margins. Nike has been profitable 10 in the last 10 years. Over the past twelve months, the company has posted revenue of $38.5 billion and earnings of $2.12 per share. Its operating margin is 10.87%, which ranks better than 82% of companies in the Industry – Clothing and Accessories sector. Overall, GuruFocus ranks Nike’s profitability an 8 out of 10, indicating strong profitability. Here is Nike’s revenue and net income for the past few years:
Growth is probably one of the most important factors 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. If a company’s business is growing, the company generally creates value for its shareholders, especially if the growth is profitable. Similarly, if a company’s revenue and profits decrease, the value of the company will decrease. Nike’s 3-year average revenue growth rate is higher than that of 68% of companies in the Industry – Apparel & Accessories sector. Nike’s 3-year average EBITDA growth rate is -6.3%, which is in line with the average for companies in the Industry – Apparel & 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 20.09, while its WACC was 6.55. Nike’s historic ROIC vs WACC comparison is shown below:
In conclusion, Nike (NYSE:NKE, 30-year Financials) stock shows all signs of significant overvaluation. 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.
To discover high quality companies that can deliver above average returns, please check out GuruFocus High Quality Low Capex Screener.