Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * 5 year average earnings per share * book value per share), which for Nike gives us a fair price of $23.91. In comparison, the stock’s market price is $118.97 per share. Therefore, Nike’s market price exceeds the upper bound that a prudent investor would pay for its shares by 397.57%.
The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis requires us to look at the following fundamentals of Nike:
Sales Revenue Should Be No Less Than $500 million
For Nike, average sales revenue over the last 5 years has been $40,834,400,000, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.
Current Assets Should Be at Least Twice Current Liabilities
We calculate Nike's current ratio by dividing its total current assets of $28,213,000,000 by its total current liabilities of $10,730,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. In Nike’s case, current assets outweigh current liabilities by a factor of 2.63.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Nike’s debt ratio is 0.54, the company has healthy debt levels. We calculate Nike’s debt to net current assets ratio by dividing its total long term of debt of $9,420,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years
Nike had negative retained earnings in 2020, but on average they $4.1 Billion. Ignoring the outlier year of 2020, the company has had a strong history of generating cash.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years
Nike has offered a regular dividend since at least 2008. The company has returned a 1.15% dividend yield over the last 12 months.
A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years
We are going to compare Nike's earnings per share averages from the two 'bookends' of the 15 year period for which we have data. The first bookend comprises the years 2008, 2009, and 2010, whose EPS values of $3.74, $3.03, and $3.86 average out to $3.54. Next we look at the years 2020, 2021, and 2022, whose values of $1.60, $3.56, and $3.75 average out to $2.97. The growth rate between the two averages does not meet Graham's standard since it is -16.1% — but we do note that the negative trend is due to the outlier year 2020.
In conclusion, Nike does not have the profile of a defensive stock according to Benjamin Graham's criteria despite its healthy balance sheet and solid dividend, because in addition to trading far above its fair value, it has a flat EPS growth trend.