One of Wall Street's biggest winners of the day is NIKE, a footwear & accessories company whose shares have climbed 5.5% to a price of $77.03 -- 10.17% below its average analyst target price of $85.75.
The average analyst rating for the stock is buy. NKE may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 52.2% over the last year, returning -29.3%.
NIKE, Inc., together with its subsidiaries, engages in the design, development, marketing, and sale of athletic footwear, apparel, equipment, accessories, and services worldwide. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
NIKE's trailing 12 month P/E ratio is 23.8, based on its trailing EPS of $3.24. The company has a forward P/E ratio of 31.8 according to its forward EPS of $3.23 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.6, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand the strength of NIKE's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
NKE's average gross profit margins over the last four years are 44.7%, which indicate it has a potential competitive advantage in its market. These margins have slightly increased over the last four years, with an average growth rate of 0.5%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From NIKE's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 7,429,000 | 812,000 | 6,617,000 | 35.82 |
| 2022 | 5,841,000 | 969,000 | 4,872,000 | 9.98 |
| 2021 | 5,188,000 | 758,000 | 4,430,000 | -25.7 |
| 2020 | 6,657,000 | 695,000 | 5,962,000 | 326.16 |
| 2019 | 2,485,000 | 1,086,000 | 1,399,000 | -70.76 |
| 2018 | 5,903,000 | 1,119,000 | 4,784,000 |
- Average free cash flow: $4.68 Billion
- Average free cash flown growth rate: 6.7 %
- Coefficient of variability (the lower the better): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NKE have received an annualized dividend yield of 2.1% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
NIKE's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 8, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.19 as of the third quarter of 2024.
With an average P/E ratio, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend, we can conclude that NIKE is probably undervalued at current prices. The stock presents poor growth indicators because of its decent operating margins with a stable trend, and an inflated PEG ratio.
