NKE
TABLE OF CONTENTS
Executive Summary
1
Overview of Firm
3
Five Forces Model
4
Value Chain Analysis
12
Competitive Advantage Analysis
14
Key Accounting Policies
16
Accounting Flexibility
19
Evaluation of Accounting Strategy
22
Evaluation of Disclosure Quality
24
Potential Red Flags
26
Undoing Distortions
28
Financial Ratio Analysis
29
Statement Forecasting Methodology
45
Weighted Average Cost of Capital
46
Discounted Free Cash Flows
50
LR ROE Residual Income
50
Abnormal Earnings Growth
51
Method of Comparables
52
Final Recommendation
58
References
59
Appendices
60
NKE
SUMMARY FINDINGS
NKE--- NYSE
52 Week Range
Revenue (2006)
Market Capitalization
$ 80.31
$75.52 - $99.30
$14.955 billion
$24.6 billion
Shares Outstanding
256 million
Dividend Yield
3-month Avg Daily Trading Volume
Percent Institutional Ownership
1.50%
1,830,510
Book Value Per Share
ROE
ROA
Est. 5 year EPS Growth Rate
Cost of Capital Estimates
Ke estimated
5-year Beta
3-year Beta
2-year Beta
Published Beta
Kd
WACC(bt)
Altman Z-Score
Eps Forecast
FYE
EPS
Valuation Ratio Comparison
Trailing P/E
Forward P/E
Forward PEG
M/B
88.83
24.66%
14.10%
22.71%
Beta
3.47811
NIKE
Ind Avg
$14.84
$19.59
$17.43
$24.75
0.1855
0.3254
Valuation Estimates
R2
Ke
0.580 0.138 4.39%
0.360 0.143 4.35%
0.970 -0.077 4.45%
7.83%
2006(A) 2007(E) 2008(E) 2009(E)
5.44
6.23
7.21
8.35
Actual Current Price
$80.71
Ratio Based Valuations
P/E Trailing
P/E Forward
PEG Forward
Dividend Yield
M/B
$14.84
$17.43
$18.35
1.53%
Intrinsic Valuations
Discount Dividends
$ 98.35
Free Cash Flows
$ 152.24
Residual Income
$ 87.08
Abnormal Earnings Growth
$ 96.90
Long-Run Residual Income Perpetuity
$ 91.01
NKE
STOCK CHARTS
NKE
EXECUTIVE SUMMARY
In the sportswear apparel industry, there are three main
companies: NIKE, The Adidas Group, and Under Armour, and K-Swiss. Under
Armour, a relatively new firm, is a main competitor in the apparel industry
because of their major contracts and endorsements with athletic teams. New
entrants do not have the strong reputation to back them up and give them the
ability to purchase millions of units of a product and would have a more difficult
time finding a manufacturer to produce a large amount of goods for a low price.
With this said, professional sport teams and league still have the power to
bargain for lower prices because they have sufficient capital to commit to
purchasing large quantities of new items for several years. In a report on
corporate responsibility, NIKE brand presidents write that their goals are, “to
effect positive, systemic change in working condition within the footwear, apparel
and equipment industries; to create innovative and sustainable products; [and]
to use sport as a tool for positive social change and campaign to turn sport and
physical activity into a fundamental right for every young person.”
This is one of those areas that cannot be accurately assessed because
there is no way to tell exactly how long an endorsee’s peak performance will
impact an audience and influence them to purchase NIKE products; just as a
marketing campaign’s full effect on consumers can never be measured. For
example, if NIKE had predicted that Terrell Owens would have a season-long
performance peak and then an accident with prescription drugs caused him to be
out for the rest of the season; would NIKE continue to expense a royalty to him
over the predetermined period or absorb the rest of the cost when it is
determined the peak-performance period is over? Under cooperative advertising
programs, NIKE records selling and administrative expenses to reimburse their
retail customers that advertise NIKE products in their commercials etc. For
endorsements, accounting measures depend on their specific contract provisions
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such as particular achievements that are expensed to S&A. With any company,
there is the risk of their management influencing accounts in order to show
better numbers for the end of the year or show a larger amount of assets, fewer
liabilities, or a higher net income.
Overall, NIKE's operating efficiency was favorable as there was an
increase in gross profit margin; although there was not a substantial change in
the operating expense ratio, the decrease remains favorable. Nike has a current
ratio between 2 and 3 which is below the industry average, however is still within
a range that shows they are able to pay off their current liabilities yet is low
enough to show their assets are being utilized. Nike being lower than the
Industry average is not surprising since their net profit margin and asset turnover
(ROA= net profit margin x asset turnover) were both lower than the Industry
average.
It is valid to include NIKE’s interest income into these computations
because the interest they earn off of lending their assets or keeping cash money
in the bank means they have to borrow less money to finance their assets. This
means that an increasing WACC because of increasing world interest rates would
not put the firm at a disposition to other firms in the same industry because it is
likely their WACC would rise by the same amount, if not more. In comparison, if
a company’s ROE is not high, it shows that they do not use their money wisely to
spend on their own company; the money put into the firm is not used to their
advantage to make profits. It is a good thing if NIKE’s equity value increases
each year, as it indicates that they can use more of what they invested to
generate profits and growth of the company. The price to free cash flows ratio
shows how much actual cash can be generated per dollar of stock equity.
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NKE
OVERVIEW OF FIRM
NIKE, Inc. is one of the top sellers world-wide of athletic footwear,
apparel, equipment and accessories. NIKE and its subsidiaries sell everything
from athletic and casual footwear to apparel and accessories for men, women
and children. Largely because of their reputation of quality products, NIKE has
an extremely loyal customer base. NIKE products are sold online at nike.com,
through its own retail stores dubbed NikeTown, and through a mix of
independent distributors and licensees in over 160 countries. NIKE owns five
domestic footwear and apparel distribution facilities as well as 21 distribution
centers spread across Canada, Europe, Asia, Australia, Latin America, and Africa.
HISTORY.
The company was founded in Oregon by Phil Knight and Bill
Bowerman in Oregon in 1968 and has since successfully developed into an
internally well-known brand.
The company’s mission statement, written by
Bowerman, states their goal is “to bring inspiration and innovation to every
athlete in the world”, and he also adds “If you have a body, you are an athlete.”
NIKE continues to improve their products and service for their customers. NIKE
remains in the sportswear and apparel industry throughout its subsidiary brands:
Cole Haan, Bauer, Converse, and Hurley.
RECENT FINANCIALS. The sales volume and growth for NIKE has differentiated
in the past five years. The sales volume for
fiscal year 2006 (June 1, 2005 – May 31,
2006) was $14.9 billion, growing over $5
billion over the past five years.
In
comparison, The Adidas Group grew less
than $2 billion over the same time period.
The sportswear industry as a whole had a
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sales volume of $265.4 million in 2006.
NIKE’s dominance in the industry is
clearly shown by it’s above- industry-average growth in sales over the past five
years.
The market capitalization for NIKE is $20.95 billion, which is the highest among
its rivals. The total asset value has steadily increased over the past five years by
3.4 billion.
The stock price is currently between $81 and $83 for the 255.4
million shares outstanding. Last year’s high and low were $91.54 and $76.53
respectively. Stock Scouter rates NIKE, Inc. stock a 7 on a 10-scale because it is
expected to outperform over the next six months and has a very low risk with a
medium-to-high return.
NKE
FIVE FORCES MODEL
Strategy analysis is important to assess a specific firm’s profit drivers and
key risks. This enables the analyst to easily evaluate a firm’s current and past
performance and make an educated guess of the firm’s future production.
COMPETITIVE FORCE 1: EXISTING FIRM RIVALRY
INDUSTRY GROWTH. According to sales, earnings, and assets in the industry as
a whole, the sportswear apparel industry has experienced significant growth over
the past five years. This growth can largely be attributed to the recent interest
in health and physical wellness. The government, as well as companies from
many other industries, have funneled billions of dollars into convincing Americans
to increase their level of exercise. Everyone in the sportswear apparel industry
has experienced the spill-over effects of these health campaigns. However, this
industry is a luxury market, and being such, experiences a decline in sales when
the economy is in recession.
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NIKE is an aggressive price competitor that continues to flourish by taking
over market share from other companies and by building strong customer
satisfaction with their loyal clientele and newcomers.
CONCENTRATION AND BALANCE OF COMPETITORS. In the sportswear apparel,
industry, the main companies include:
Under Armour.
NIKE, The Adidas Group, KSwiss, and
Before The Adidas Group and Under Armour became major
players in the industry, NIKE could set their prices to create a larger gross
margin.
However, recently, NIKE has had to price its products more
competitively in order to remain the dominant force in the industry. For example,
in recent years, NIKE has based the price for it’s footwear apparel in accordance
to Adidas footwear prices, which average slightly over $110 a pair, depending on
the sport and gender the shoe is intended for.
The sportswear apparel industry is generally broken into two categories,
footwear and apparel/accessories. The Adidas Group, which owns both Adidas
and Reebok, is the main competitor in the footwear division, however, they are
an active player in the apparel and accessories market.
Under Armour, a
relatively new firm, is a main competitor in the apparel industry because of their
major contracts and endorsements with athletic teams.
Under Armour only
recently entered the footwear segment and may rise to become a strong
competitor within the next few years.
NIKE has also entered the skating
equipment and apparel industry with its acquisition of Hurley.
Quicksilver,
alongside Hurley, controls the skating equipment and apparel industry.
NIKE is the dominant industry according to sales and revenues, however,
it still has challenging competitors.
NIKE and Adidas must steer clear of
extensive price competition by cooperating with each other to maintain a
reasonable, yet profitable price, for their footwear and apparel.
DIFFERENTIATION & SWITCHING. The increase in competition has created a
greater demand for lower-priced luxury sports apparel. A strong brand name
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attributes to a relatively smooth expansion process. In order to survive in this
industry, companies constantly attempt to differentiate themselves from other
companies and develop innovative ideas to attract new generations of customers.
For example, NIKE has expanded its sportswear line to include consumer
electronics like watches, MP3 players, and iPod accessories. Thanks to the NIKE
brand’s reputation of quality, these electronics are identified with same standard
of quality even though NIKE had no experience in the consumer electronics
industry ten years ago. Under Armour hopes to use this same concept to break
into the footwear segment. Price is going to become a larger competitive force if
Under Armour successfully completes a move into footwear.
In this industry, companies must successfully differentiate their products
to avoid destructive price competition. If a company can distinguish their goods
from their competitors effectively, then low switching cost should not be a threat.
FIXED/VARIABLE COSTS.
Since NIKE is involved in a product, not service,
industry, variable costs are more of a concern than fixed costs. Since, NIKE is
involved in a more product-demand-driven industry, they do not experience the
intense price wars that go on in the airline industry. However, price has now
become a factor that significantly affects demand.
With the new major
contenders, NIKE has had to price its products more competitively. Even though
the industry is not growing as aggressively as it was a few years ago, it is still
growing, therefore it is important that NIKE continues to steal market share from
their top competitors.
EXCESS CAPACITY/EXIT BARRIERS. NIKE is spread across so many industries
that exit barriers are almost non-existent. The name “NIKE” is so recognizable
that they could seamlessly leave one segment and move to another.
Excess
capacity is generally shipped to any of NIKE’s 193 factory outlet stores and sold
at a discount price.
Companies in this industry share the same goal of making their brand
familiar and identifiable by their target consumers.
Valuation of NIKE, Inc.
Companies, such as The
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Adidas Group, are just as identifiable as NIKE and share the same ability to
branch out and experience other segments, making their exit barriers just as
absent as NIKE’s.
There are significant rivalries in this industry, yet NIKE continues to lead
ahead of the others with higher revenues and sales on average than other
companies.
COMPETITIVE FORCE 2: THREAT OF NEW ENTRANTS
In this industry, the higher the earnings are for a particular firm, the more
attractive the industry will seem to incoming firms. If more companies enter the
industry, then the new competition will lead to a restraint in pricing and
subsequently, lower profits for existing firms. It’s not extremely difficult to enter
this industry of shoes and apparel, but with firms such as, NIKE and The Adidas
Group, it will be a challenge for new comers to compete with the existing firms.
ECONOMIES OF SCALE. It would be very difficult to start a company that could
compete with NIKE, The Adidas Group, or Under Armour because of their worldwide recognition.
A new company would require an initial investment in a
nation-wide marketing campaign that would rival the funds the big three have
budgeted for marketing.
Funds would be better spent on increasing brand
recognition than a larger inventory. At worst, a small inventory could make a
new brand considered exclusive and prices would increase.
The best place for a potential competitor of NIKE to develop and start
would most likely be in a country where NIKE does not dominate the market.
This would allow the new company to slowly gain capital and expand into more
developed countries. However, this option is not as feasible because it would
take much longer to turn a profit in a less wealthy country.
Relationships and pre-negotiated prices with manufacturers are other
advantages that those already in the market would benefit from. New entrants
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don’t have the strong reputation to back that they will be able to purchase
millions of units of a product and would have a more difficult time finding a
manufacturer to produce a large amount of goods for a low price.
If
manufacturing costs are high then the newcomer would not be able to compete
very effectively on a cost-basis.
A new firm will most likely endure a significant loss from entering this
industry, at least in the first few years. New firms will have to undergo intensive
research and development, brand advertising, and plant and equipment costs
that will ultimately consume a large portion of their capital.
FIRST-MOVER ADVANTAGE.
First-mover advantage brings leverage to a
company. By setting high industry standards, a company may discourage
other
companies from entering the industry. NIKE has had the first-big-mover
advantage with sports-performance footwear.
With the apparel industry,
however, brand recognition seems more important than the first-mover
advantage.
Under Armour, the leader in that segment, has had many
predecessors: Champion and Rawlings just to name a few.
With clothing,
consumers find a brand that has the look and fit they like and generally stick
with that brand.
If NIKE gets to the consumers first, then there is a higher
chance that consumers will stick with them. Companies like Under Armour have
convinced their customers to switch from NIKE or Champion with an elaborate
marketing campaign identifying their products with those of warriors.
NIKE has established high standards as the first-movers into this industry.
However, incoming companies such as Under Armour, are acquiring knowledge of
the market at a rapid pace and NIKE will have to improve quality and reduce
costs if they want to stay ahead.
CHANNELS OF DISTRIBUTION AND RELATIONSHIPS.
sportswear apparel are major league sports teams.
Major purchasers of
The NFL currently has
contracts with NIKE, Adidas, and Under Armour so that no other brands can be
displayed on the football field.
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NIKE has been developing relationships with
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American sports major leagues since it’s conception.
Major league sports
contracts not only directly lead to increased sales, but increase brand
recognition. Consumers look up to sports heroes and want to wear the same
kind of jersey their role models wear.
LEGAL BARRIERS.
government.
The sportswear industry is not heavily regulated by the
However, as NIKE enters the consumer electronics industry, all
electronics must be approved by the FCC before sale can begin. Another legal
barrier would be that since the industry is changing so rapidly, it is often too
difficult to acquire a patent for a product before it is made available for sale.
This gives competitors the chance to copy the product before it is protected.
Legal barriers such as patents and copyrights limit the possibility of
entering the industry for other companies.
NIKE should implement a way to
patent some of their products in advance to eliminate any possible replication of
their products.
COMPETITIVE FORCE 3: SUBSTITUTE PRODUCTS
The sports apparel market has a variety of substitute products.
The
luxury sporting goods now have to begin to compete on price because there are
more companies in the industry. One could easily purchase an Adidas shoe, a
NIKE shoe, or a Reebok shoe from the same store for relatively the same price.
Quality is another strategy that must be focused on. NIKE and Under Armour
are both known for their high quality of goods. They are both also the most
expensive.
Innovative new styles and products are other ways to differentiate
products. NIKE uses its “Shox” shoes that have springs under the soles to sell
both on a performance aspect and a fashion aspect. Adidas does not have a
shoe with springs under the soles. NIKE also has partnered with Apple to create
the NIKE+iPod Nano running kit. This product logs your running distance and
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speed and is only compatible with Apple’s iPod Nano and NIKE’s NIKEplus
running shoes.
Entering new markets is another way to weed out substitute products.
Creating a product that no one has a substitute for not only eliminates this
threat, but also gives them the first-mover advantage.
The most effective way for NIKE to confront the problem of competing
with other companies that are creating substitute products would be to improve
their bargaining power with suppliers, thereby reducing costs, and providing a
genuine product at a lower cost for its customers.
COMPETITIVE FORCE 4: BARGAINING POWER OF BUYERS
Price sensitivity and bargaining power are important because they establish the
amount of control a buyer attains. Price sensitivity refers to how far a customer
will go to bargain on the price of a product while bargaining power refers to their
ability to force the price down.
PRICE SENSITIVITY.
In the sportswear industry there are three types of
consumers: teams, enthusiasts, and average purchasers.
Professional and
college sports teams have large amounts of money to spend and are looking for
the best quality. Professional sports team endorsements are worth millions of
dollars in sales and marketing. Athletic enthusiasts are also looking for the best
quality, however may not have the amount of cash that sports teams have
available. This means that price per product is much more of an issue than with
professional sports teams.
Value will appeal to this group of consumers.
Average purchasers are consumers who are just looking for a good pair of tennis
shoes or a cool t-shirt. These consumers will either be drawn to the company
because of its popular brand name, history with the product, or its price.
RELATIVE BARGAINING POWER.
Buyers generally do not have a strong
bargaining power with a large corporation unless they are buying in very large
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quantities or are gathered together in large numbers.
Individual buyers
indirectly choose whether to keep a product on the market or not by purchasing
it or declining to purchase it.
In this industry, the three large companies set the prices for average
consumers and all other brands must follow suit in order to stay afloat. However,
professional sports teams and leagues have the power to bargain for lower prices
because they have the capital to commit to purchasing large quantities of new
items for several years. Nike, The Adidas Group, and Under Armour have some
say when it comes to pricing with pro sports teams. They are all diverse enough
so that losing a contract with a team would not mean going out of business.
NIKE, especially, has spread investments across so many industries that it has
the capital to support turning down unreasonably low offers. This could be a
reason why NIKE products are not sold in Wal-Mart.
Wal-Mart is known for
asking unusually low prices from its vendors. NIKE is too big of a company and
doesn’t need a contract with Wal-Mart for survival.
COMPETITIVE FORCE 5: BARGAINING POWER OF SUPPLIERS
The threat of bargaining suppliers exists on a different level for each firm.
For larger firms like NIKE, bargaining suppliers pose less of a threat since NIKE is
so large of a company. However, up and coming smaller companies would have
to succumb to the prices that their suppliers demand because they do not have
the necessary infrastructure to backwards or forwards integrate. Furthermore,
most major companies in this industry are not limited to a single supplier. Since
these companies generally sell a variety of products, they have a variety of
specialty manufacturers to choose from.
Backwards integration would mean to manufacture your own goods
instead of outsourcing them to other countries. Forward integration would be to
open one’s own retail stores to distribute directly to the public. The cheapest
way to sell directly to the public is online. There is a very small setup fee in
comparison to opening a “brick and mortar” store. Selling apparel and footwear
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online is oftentimes difficult because customers prefer to see clothing and try
them on before purchasing. This has made the cheap online outlet very difficult
to convince customers to purchase from. This is being combated by offering free
shipping and loose 30-day return policies.
NIKE is a critical buyer from their suppliers, therefore NIKE has a lot of
influence over them.
NKE
VALUE CHAIN ANALYSIS
The only way to survive in an industry like the sportswear and
apparel industry is to create an unparalleled competitive advantage.
INDUSTRY GROWTH.
The industry’s growth goes hand-in-hand with NIKE’s
success. If the industry is experiencing a decline in sales, then it is probable that
NIKE will suffer as well.
This luxury industry’s growth fluctuates with the
economy. Only over the most recent years has the sportswear apparel market
experienced significant growth. These items are considered a luxury because
their high quality would make them comparable to the “Lexus” of sportswear.
Industry growth could also be attributed to an increased variety of
products sold. No longer do the companies that make up this industry focus on
just sports apparel and footwear. NIKE and its competitors have expanded into
the consumer electronics industry, such as the NIKEplus, as well as the fashions
outside of sporting goods. There are also new players in the industry that have
recently experienced tremendous growth, namely Under Armour. Over the past
four years, Under Armour has increased revenues by over 200%.
Industry
growth overall has increased 9.5% over the past five years, an encouraging
increase that NIKE contributed to.
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DIFFERENTIATION, INNOVATION, AND SUBSTITUTES.
This specific luxury
industry uses brand recognition as an avenue to avoid competition based on
price. All three major players – NIKE, Adidas, and Under Armour – are known
for producing a quality good. Clever advertising campaigns are used to entice
customers when there is little differentiation. For example, NIKE ads generally
just show a variety of people participating in athletics followed by their swoosh
logo and “Just Do It” slogan. Comparably, Under Armour ads generally are very
high-paced and show athletes prevailing in intense, intimidating situations; and
of course, their logo and slogan “Protect This House” follow.
In an industry with so many similar and substitutable products, the major
brands are constantly having to innovate new ways to attract buyers.
For
example, NIKE introduced its NIKE+iPod system to track running and attract
runners to its shoes.
Similarly, Adidas created an “intelligent” shoe that
automatically adjusts pressure in the shoe to conform to your foot.
FIRST-MOVER ADVANTAGE.
The first-mover advantage closely ties in with
innovation because the first company to create a new product is essentially the
first-mover in that segment.
Furthermore, the first in the industry is often
regarded as an “innovator” and those who follow are regarded as “imitators.”
The first to move into an industry often wins the public’s trust. First-movers are
also associated with a higher level of customer loyalty.
BUYER RELATIONS. Professional sports teams are among the most important
endorsements a company can make in this industry. All three main companies
have contracts with major league and NCAA sports teams. These endorsements
not only consist of millions of dollars worth of purchase agreements but also
include marketing and promotional benefits.
Since the sporting apparel is so
closely related to sports, having professional athletes represent your company’s
products is extremely important.
Sporting enthusiasts and other customers can find sporting apparel at a
variety of locations. Almost all brands have an online store where anyone with a
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credit or debit card can purchase their goods. However, most sporting apparel
and footwear is sold through retailers like Foot Locker.
NKE
COMPETITIVE
ADVANTAGE ANALYSIS
It’s imperative that NIKE remain competitive in the industry to survive. In
a report on corporate responsibility, NIKE brand presidents write that their goals
are, “to effect positive, systemic change in working condition within the footwear,
apparel and equipment industries; to create innovative and sustainable products;
[and] to use sport as a tool for positive social change and campaign to turn sport
and physical activity into a fundamental right for every young person.” There are
several ways they do this.
INDUSTRY GROWTH. Expansion and growth in the industry of the textile and
athletic apparel industry has enabled growth in the NIKE Corporation.
Controlling over 20% of the athletic shoe market, NIKE is the number one
shoemaker in the nation, not to mention the world.
Compared to its
competitors, NIKE controls most of the industry and is growing rapidly. Over the
past five years, NIKE has had increasing revenues of $5 billion while Adidas had
just under $2 billion. The increasing number of sales has been largely attributed
to their increasing number of distributors worldwide. The easier it is to transport
the products to the buyers, the easier it is to see how the number of sales has
risen worldwide in the past five years. NIKE’s subsidiaries also provide for their
rapid growth because they only add to their total sales; the wide-variety of
products from the different stores also contributes to their increasing sales. Since
NIKE has a large customer base, there are many loyal customers who contribute
to year-to-year revenues.
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DIFFERENTIATION, INNOVATION, AND SUBSTITUTES. NIKE, from meager
beginnings has, through the years, become a leader in the footwear and apparel
industry based on their brand identification. This was not all accomplished in
one day but over many years of research, product development, and creative
innovation.
Historically Nike's innovation has been unsurpassed and rarely
equaled. This began with the waffle iron used to produce a new rubber sole for
the first Nike running shoe. Since that time Nike has had much success with the
Nike "Air" cushion system developed for the running shoe and popularized by the
1990s basketball craze surrounded by Michael Jordan.
The most recent
innovation by NIKE is the combining of NIKEplus shoes and Apple iPod Nano
“tune your run” system.
FIRST-MOVER ADVANTAGE. When it comes to must-haves, NIKE took innovation
to the next level by teaming up with Apple, the leading innovator in music. NIKE
footwear now provides customers with a detailed report of their workouts by
tracking a runner's progress through sensors within the shoes and transferring
the information to the iPod Nano. However, NIKE's innovation was soon imitated
by Sony's MP3 player that includes a built in pedometer to measure calories,
distance, and the number of steps taken. Sony also allows consumers to upload
information to a website, that charts a runners progress, just like the
NIKEplus.com site provides. As long as NIKE's innovations continue to win over
customers, there will always be the threat of imitators.
BUYER RELATIONS. The better the buyer relations a company such as NIKE has,
the better the numbers are in their sales. NIKE is very skilled in connecting the
buyer to the product.
Through online stores, customers are met with
convenience as they can access their favorite shoes or clothing at their very own
home. NIKE has made it possible to order products conveniently online to keep
the customers easily connected without having to go shopping. Also, NIKE has
their own upscale retail stores named NikeTown in New York and outlet stores
that sells their products spread throughout the world. NIKE’s number one outlet
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for sales is through resellers.
Footlocker, for example, accounts for 10% of
Nike's sales.
Their relationships made with professional teams and professional athletes
that account for NIKE’s growth. Endorsement deals are presently worth $1.7
billion, down from $1.9 billion from 2005. For example, Lebron James of the
Cleveland Cavaliers has an endorsement deal worth $90 million and Tiger Woods
has a $100 million endorsement deal. Since Nike uses their name with these
athletes, customers associate NIKE’s image with well-known and skilled
professional athletes.
NKE
KEY
ACCOUNTING POLICIES
NIKE, Inc. is a retail company that competes on product quality and
innovation. Because they have been around significantly longer than some of
their competitors, NIKE has certain strengths such as brand loyalty that newer
companies may not have.
However, several other advantages remain in the
industry regardless of the firm’s time in practice. Unfortunately for NIKE, these
benefits go hand and hand with critical success factors, and are each very
possible for any firm to take part in. Research and development is one of NIKE’s
main focus for studies, and this advantage enables NIKE to get a head of the
competition in terms of developing their products to their loyal customers. They
also compete mainly on differentiation to set themselves apart from their
competitors. Innovative new products are one of the key success factors that
NIKE depends upon as well.
ACCRUAL ACCOUNTING. NIKE uses the accrual accounting method conforming
to the most recent GAAP standards. Revenue is recognized at the time of sale
and accounts receivable are created if cash is not paid immediately. Customers
Valuation of NIKE, Inc.
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must accept the product, along with its risks and rewards, for revenue to be
recognized. International receipt dates are estimated because the exact date of
receipt might not be readily available. If estimates are significantly inaccurate,
net revenue is adjusted for the erroneous period.
INVENTORY MANAGEMENT. Inventory assets are priced at the lower of their net
realizable value or the price they were bought at. If the two are not equal, the
difference of the two is taken and is added to the inventory reserve account.
This ensures that assets equal the sum of liabilities and equity.
Inventory is
managed on a FIFO or moving average basis. NIKE does not own any factories
to manufacture their goods so all inventories are finished goods.
ADVERTISING AND PROMOTIONAL EXPENSES.
NIKE lists their endorsement
contracts under a “demand creation expense” account.
Their endorsement
contracts are generally expensed evenly throughout the life of the contract.
However, certain contract provisions may prevent uniform amortization of
endorsement expenses.
Extra expenses in regards to endorsements are
recognized when the expenses happen. Other expenses related to endorsement
contracts could include endorsement bonuses for being a top-ranked player in a
sport or winning a championship. However, when it is probable that a peaked
performance will be maintained throughout a period of time, the outlay is
expensed throughout the estimated period.
Royalty payments are also paid
based on predetermined percentage of sales. These are expensed as a “cost of
sales” expense and are expensed out when sales are made. However, if sales do
not meet those goals and NIKE committed to paying a minimum fixed royalty, it
is expensed throughout the contract.
Advertising production expenses are realized when the advertisement is
first published.
The actual cost of advertising is realized the month the
advertisement runs. Some advertising expenses are reimbursed to distributors
who have advertised NIKE products. These expenses are filed under selling and
administrative expenses and are not part of the demand creation account.
Valuation of NIKE, Inc.
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Advertising reimbursements are recorded when the customer demands the funds
which may be before the actual advertisement is ran.
GOODWILL. Goodwill and intangible assets with indefinite lives are measured for
impairment in the fourth quarter of the fiscal year. The estimated fair value is
compared to the carrying value to test for impairment.
NIKE will recognize
impairment if the carrying value exceeds the estimate of fair value, and calculate
the surplus of the carrying value over the fair value estimate to get impairment.
These estimates are subject to change in future years because of changes in the
economy, technological changes, inability to meet business requirements, etc.
Any impairment calculated for goodwill will be classified on the consolidated
statement of income as part of income before taxes.
Over the past five years, NIKE has not written any of their Goodwill assets
off. Having tendencies towards not writing expenses off indicates an aggressive
accounting policy.
Certainly some of the value of NIKE’s Goodwill assets has
used up their extra earnings capacities since five years ago.
FOREGIN CURRENCY EXCHANGE. NIKE is involved in the global market which
exposes them to risks such as changes in foreign currency exchange rates and
interest rates.
NIKE uses forward exchange and option contracts to hedge
transactions made in foreign currency. Changes in fair values are recorded in the
comprehensive income once the particular criteria required, under the
"Accounting for Derivative and Hedging Activities," has been met.
After the
maturity of the derivative, the losses and gains are transferred to net income. In
this accounting treatment, the forward exchange contract should not exceed the
anticipated transactions. If anticipated or actual transactions fall below hedged
levels, NIKE readjusts their comprehensive income, or they make adjustments to
the hedge contract to correlate with the revised anticipated transaction.
NOTES. For the exception its stock option plan for executives, NIKE does not list
the retirement benefit liabilities for its 28,000 employees.
Valuation of NIKE, Inc.
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disclose whether they offer a defined benefit or contribution plan. Enforcement
of intellectual property rights is declared “not material” to the financial position of
the company.
NIKE’s management team takes on the full responsibility of
maintaining a set financial statement schedule.
NKE
ACCOUNTING
FLEXIBILITY
After overlooking NIKE’s recent financial statements, we have
determined that NIKE has a fairly strict set of accounting policies. There is little
room for flexibility in most areas.
RESEARCH AND DEVELOPMENT. Research and development is a significant part
of NIKE’s pioneering products.
Their unparalleled success depends on the
constant innovation of new products. NIKE’s reputation is based on being the
first to create new lines of footwear and sportswear. “NIKE strives to produce
products that help to reduce injury, enhance athletic performance and maximize
comfort.” Unfortunately, research and development cannot be adequately valued
as an asset. Therefore, there is not much flexibility in terms of laying out the
expensing of research and development costs.
ACCRUAL ACCOUNTING AND DELAYS WITH RECEIPT DATES. NIKE’s financial
statement says that revenue is recognized when the customer receives
shipments. However, international receipt dates cannot be tracked immediately
and are generally just estimates.
financial statements.
Oftentimes, this leads to inaccuracies in
NIKE says that all inaccuracies are corrected in the
financial statements.
When estimates are made, there is plenty of room for flexibility. An early
estimated receipt date of a large shipment to a European retail chain could
Valuation of NIKE, Inc.
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significantly boost revenues and raise stock prices.
While this could be
corrected, it will take longer and would likely not cause as much of a downfall in
stock prices as the boosted revenues caused a stock price raise.
A more accurate way of measuring when international revenues are
recognized would be to track shipments electronically and give buyers only one
week to verify that the shipment is correct before declaring it received by default.
This way estimates could be avoided in this area all together.
INVENTORY MANAGEMENT. NIKE’s inventory is valued on either a first-in, firstout (FIFO) or moving-average cost basis. This demonstrates NIKE’s wide range
of flexibility when it comes to recording inventory. The financial statement does
not state which inventories are valued on a FIFO basis and which are valued on a
moving-average basis. It also neglects to state if that changes on a year-to-year
basis.
We are assuming that the same type of inventory would be valued
according ot the same standards of the previous year unless it is disclosed in the
financial statement notes under the “Inventory” section. However, since their
financial statement doesn’t specifically say that they use the same method yearafter-year so this leaves the option to use whichever method makes the financial
statements look better.
Since NIKE does not own any factories and all manufactured merchandise
delivered to them are finished goods, they do not have to concern themselves
with recording the value of unfinished goods.
ADVERTISING AND PROMOTIONAL EXPENSES. Endorsement contracts amount
for a large portion of NIKE’s promotional expenses. Payments are based upon
specific contract provisions and are generally expensed equally throughout the
term of the contract. They reimburse retail clientele for a portion of the costs of
advertising their products. This induces flexibility in recording advertisement and
promotional costs since it all depends on the terms and length of the individual
contracts with companies such as footlocker or key spokesmen and supporters
Valuation of NIKE, Inc.
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like Tiger Woods. Royalties for peak performances of endorsement contractors
are often expensed over a period of time that the company determines the
“peaked performance” will last.
The financial statements disclose no guidelines or limits as to how long a
endorsee’s peak performance period can last. This is one of those areas that
cannot be accurately assessed because there is no way to tell exactly how long a
an endorsee’s peak performance will impact an audience and influence them to
purchase NIKE products; just as a marketing campaign’s full effect on consumers
can never be measured. However, NIKE expenses print and media advertising
campaigns when they are run. Using this same concept, NIKE should declare the
royalty expense when it is incurred and not spread it across several months time.
Expensing royalty payments over long periods of time could be used as a
tactic to overstate income. Furthermore, if NIKE’s estimation is overstated, it is
not disclosed how they would correct the overstatement. For example, if NIKE
had predicted that Terrell Owens would have a season-long performance peak
and then an accident with prescription drugs caused him to be out for the rest of
the season; would NIKE continue to expense a royalty to him over the
predetermined period or absorb the rest of the cost when it is determined the
peak-performance period is over?
If it is absorbed at the end of the peak-
performance period, this could cause a very high increase in expenses.
NIKE does not reveal how they expense specific promotional scenarios
such as, for example, footlocker advertising a sale and promoting NIKE’s
merchandise. We are not informed of how or when it is expensed, and therefore
circumstances such as these require NIKE to be flexible in their expenses.
Valuation of NIKE, Inc.
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NKE
EVALUATION OF
ACCOUNTING STRATEGY
NIKE is considered to be aggressive based in their industry. They tend to
overestimate their earnings and underestimate their expenses. This could be a
potential problem for NIKE despite the fact that they do dominate the market.
NIKE’s disclosure of accounting strategies conveys how well they account for this
aggressive stature. The following strategies coincide with their result in being
aggressive.
The Textile – Apparel Footwear and Accessories – industry can be very
difficult to survive in.
It is an industry with only a handful of dominant
competitors. These competitors however, are extremely large firms that have
enough impact to lead the product direction of the entire industry, as well as
completely diminish other participating companies. NIKE is the dominant force in
this industry. NIKE, for the most part, appears to provide their consumers with
detailed, honest statistics. Although the majority of the leading players in this
industry follow the same guidelines, there are still a few differences that explain
how NIKE stays ahead of the game. NIKE is aggressive in
MANAGERIAL CONTROL.
Almost every firm in the apparel and footwear
accessories industry uses the same regulations when disclosing their controls and
procedures. There is a tight list of events and time periods that are specified by
the General Accepted Accounting Principles delegated by the Securities and
Exchange Commission. Once all of the necessary information is gathered it is
sent to upper management, usually the CEO and CFO decide the specifics of the
disclosures presented to the public. This process is called the “Management’s
Report on Internal Control over Financial Reporting,” and is listed in Item 8.
Nike is described as flexible in their accounting procedures. Because they
are considered flexible, they have an incentive to skew their numbers to where
Valuation of NIKE, Inc.
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they look like they are doing financially well. As opposed to being strict, NIKE has
leeway associated with their statements to convey that they are doing well, even
when they are not. This is not a favorable characteristic for NIKE.
The main purpose of this procedure is to provide ‘reasonable assurance’
concerning the preparation and dependability of financial reporting for external
purposes, in agreement with the generally accepted accounting principles.
Clearly, NIKE is restricted to some very specific accounting guidelines, along with
the rest of the industry.
INVENTORY MANAGEMENT. The inventory management techniques required for
NIKE and their top competitive market threats (Skechers, Coach, and K Swiss)
are very comparable. With the identical decision to use FIFO and straight-line
depreciation methods, these firms see similarities relating to their revenue
recognition, inventory reserves, advertisement contracts, and foreign exchange
risks. Based on the terms of sale, wholesale revenues are recorded when the
title passes to the customers. This may differ for those companies who have
their own manufacturers because it requires keeping record of the different
stages their products go through, whereas NIKE has only finished goods to keep
track of.
Other resemblances include how various estimations are made based on
historical records and credits; or how goodwill and other intangible assets are
measured for impairment instead of amortized. Finally, all of these companies
have the unpleasant risk of the foreign rate exchanges. After translating these
foreign currencies into US dollars, the accumulated amount is added as a
component of comprehensive income in shareholders’ equity
MARKETING CAMPAIGNS. Not only does NIKE have greater resources than their
competition, they also spend a significant amount of money on marketing
strategies such as advertisements, endorsements, and promotions.
Under
cooperative advertising programs, NIKE records selling and administrative
expenses to reimburse their retail customers that advertise NIKE products in
Valuation of NIKE, Inc.
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their commercials etc. For endorsements, accounting measures depend on their
specific contract provisions such as particular achievements that are expensed to
S&A. We also provide endorsement contracts that promise minimum guaranteed
royalty payments. In the 2006 fiscal year alone, NIKE has recorded $1.7 billion
in their total advertising and promotion expenses.
By doing this, NIKE has
captured their priceless brand image that has helped them stay on top.
With all of the impressive information NIKE discloses, one has to be
curious about the degree of honesty the Company presents.
However, along
with those strict guidelines for accounting policies are the intricate agreements of
any debt covenant that NIKE could be involved in. Loaded with precise ratio
minimums and stern deadlines, NIKE would not even approach these types of
obligations if they didn’t have the means to keep up with them. Finally, if there
is anything suspicious on a financial statement, it will be properly explained. The
2006 cash flow activity report is an example of NIKE’s trustworthiness when they
clarified an unusual increase in inventories, explaining that it was only a result of
supporting expansion of NIKE-owned retail stores. They have minimal, if not,
zero incentive for false accounting disclosure. NIKE is the trend of the industry
that the rest of the companies follow.
!
NKE
EVALUATION OF
DISCLOSURE QUALITY
NIKE, Inc. regularly supplies its investors with a well-stated financial
disclosure document. NIKE follows the GAAP standards to expose the essence
of the company and how they conduct business activities.
Their financial
statement is separated into different sections to make it easy to distinguish
particular points of interest in the disclosure.
NIKE shows year-to-year comparisons as far back as four years. These
comparisons enable the public to see the company's growth and success
Valuation of NIKE, Inc.
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patterns. An increase in data, such as revenues, allows investors to see NIKE's
progress, and since the information falls back on the last five years, it is easy to
see the progression to the present and provides encouragement for future
growth.
!
Very few decreasing trends were shown. This could either be because
there were very few decreasing trends or because NIKE chooses to make
decreasing trends less apparent than increasing trends.
Although NIKE does offer warranties on their products, there is no mention
of warranty expense in the recent financial statements. Since NIKE is known for
their quality products, the reason for this lack of disclosure could be because
they have such a low rate of product failure that the warranty expense is too
insignificant to report. Research and development expenses are disclosed to
display the dedication to the new product innovation that has been the backbone
of NIKE"s success.
Since NIKE purchases all their products overseas, they disclose
international operations and trade policies that explain that it is cheaper to
assume the risk of a change in the foreign currency exchange rate rather than to
manufacture the products in the United States. NIKE clearly presents the risks
involved showing that they are confident enough to present any threats the
company might face.
Additionally, NIKE examines and discloses any significant fluctuations in
their financial statements. Increases or decreases in certain sections, such as
sales, are explained with reasoning like an increase in unit sales or consumer
demands. The explanation of information helps the public understand why NIKE's
changes occur and further the quality of the disclosure.
There are also
numerous note sections – including inventories, long-term debt, and common
stock – that explain their activities and reasons for significant balances.
NIKE focuses on a tax minimization strategy by choosing between FIFO
and moving-average cost basis to value their inventory. However, year-to-year
trends in inventory management are not shown which leads to some question as
to whether the same method is used year-after-year.
Valuation of NIKE, Inc.
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The audit report disclosed further shows the quality of information
presented to the public as the activities NIKE engages follow those requirements
by GAAP.
NKE
POTENTIAL RED FLAGS
RETIREMENT PLANS.
NIKE does not clearly disclose how they account for
employee pension plans. The company briefly discusses in “Notes to
Consolidated Financial Statements, Note 12” how the company contributes cash
or common stock to a savings plan, such as a 401(k). The following amounts (in
millions) were contributed to these accounts in the past five fiscal years.
2006
$22.5
2005
$20.3
2004
$17.0
2003
$15.6
2002
$13.7
The contributions are included in selling and administrative expenses.
However, there is no apparent portion in the income statements or disclosure
notes showing how those exact contributions are given out to their employees.
Furthermore, it does not state whether these stock option plans are defined
benefit or contribution based.
CASH-FROM-SALES RATIO.
Another potential “red flag” found was the
differences between 2004, 2005, and 2006 net sales: cash-from-sales ratio.
Pre-2004, this ratio has remained relatively steady each year. However, in 2004,
the ratio was 14.80. The ratio then dropped dramatically to 9.90 in 2005 and
rose again in 2006 to 15.67. This difference was not disclosed anywhere in the
annual 10-K for any of the three years.
Valuation of NIKE, Inc.
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This immense difference is most likely attributed to the amount of cash
from sales in the year 2005, because the net sales have remained at a sound
increase. An explanation for the decrease in this ratio in 2005 and then the
increase again in 2006 would have been appropriate to disclose in the company’s
respective year’s 10-Ks.
OTHER RATIONS MEASURED. Other ratios that were measured did not reveal
any significant red flags.
Net Sales/ Cash from Sales
Net Sales/ Net accounts receivable
Net Sales/ Unearned Revenue
Net Sales/ Warranty Liabilities
Net Sales/ Inventory
Sales/ Assets
Changes in CFFO/ OI
Changes in CFFO/ NOA
Total Accruals/ Change in Sales
Pension Expense/ SG&A
Other Employment Expense/ SG&A
Valuation of NIKE, Inc.
2006
15.67
5.84
n/a
n/a
7.20
1.52
0.05
0.03
0.36
n/a
n/a
2005
9.90
5.79
n/a
n/a
7.59
1.56
0.03
0.01
0.22
n/a
n/a
2004
14.80
5.36
n/a
n/a
7.50
1.55
0.39
0.19
0.02
n/a
n/a
2003
16.87
5.09
n/a
n/a
7.06
1.59
-0.15
-0.05
0.26
n/a
n/a
2002
17.19
5.48
n/a
n/a
7.20
1.54
0.42
0.14
0.16
n/a
n/a
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NKE
UNDOING DISTORTIONS
In any company there is the possibility that in their accounting they have
moved numbers or made up accounts to distort certain things for the average
investor. With any company, there is the risk their management will put accounts
where they show better ending numbers or show a larger amounts of assets,
fewer liabilities, or a higher net income.
GOODWILL. In the goodwill and amortization section NIKE does not write down
their expense at the end of each year.
Instead they have a total which can
distort the net income and liabilities section of the income statement. In 2002
182.2 million dollars was put in their amortization account and then dropped to
87 million in 2003.
After two years NIKE adds another 341.5 million to this
account and has yet to depreciate the amount over the years. If the 341.5 was
allocated throughout the past five years there would be a 68 million dollar yearly
goodwill amortization expense, which would bring assets down and raise
expenses.
OFF BALANCE-SHEET ASSETS.
NIKE also discusses "off-balance sheet'
arrangements but goes no further other than mentioning them, following with a
brief statement explaining that they do not believe they will affect the financial
position. These "off balance-sheet" items are contracts and various agreements
that are not further discussed. NIKE does not manufacture their goods, they
lease facilities and create contracts to have their goods externally manufactured.
Operating leases are usually expensed as rent, but in the case of NIKE where the
various leases do not expire until 2034 this could be considered a capital lease.
NIKE, by calling these long term "operating leases," uses a more aggressive
accounting strategy. When the estimates for 2007 through 2011 are changed to
Valuation of NIKE, Inc.
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meet a more conservative method of accounting the lease expense for the years
2007 and 2008 are less. In the year 2009 the expense becomes higher which is
going to reduce income for that year. The increase in expense for the last three
years averages 29.84 million dollars a year.
This could potentially cause a
significant reduction in net income when added to other expenses.
Overall, NIKE’s disclosure is very good.
Many things that could be potential
distortions have been disclosed and explained in footnote sections.
RATIO ANALYSIS & FORECASTING FINANCIALS.
In order for us to properly
evaluate NIKE, we had to look at their past financial performances to achieve an
understanding of what NIKE can do in the future. We looked at the growth
trends to better an understanding of what NIKE can do in the future as well as
the industry and competitors. In this section, we analyzed different ratios to gain
information relevant for the future. The ratios in this section include those from
liquidity, profitability, and capital structure. Along with these ratios we received
from NIKE, we then compared these to the industry and their competitors,
mainly Kswiss and Under Armour. With these ratios, we also forecasted several
relevant ones of NIKE and its competitors in the market for comparison.
NKE
FINANCIAL
RATIO ANALYSIS
In this section, NIKE’s liquidity, profitability, and capital structure ratios are
taken out of yearly SEC filings from the past five years to break down elements
more specifically.
By studying and relating the Basic 14 growth ratios, many
pertinent success dynamics are exposed for our knowledge. With this, we can
see the interactive links between different financial statements.
Valuation of NIKE, Inc.
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Again, we study the firm by itself along with main competitors and the
industry average. Out of the hundreds of companies in this industry, we believe
that it will be most beneficial to compare numbers with the market
representation of K- Swiss Inc. and Under Armour, as other main competitors are
in the international market and difficult from which to receive information.
In the ratio analysis, we illustrate several methods to compare numbers
and provide our public with a solid framework of NIKE’s stature. To start out, the
trend or time-series study compares the firm’s ratios over the past five years and
shows us the sustainable and internal growth rates. Next is the cross-sectional
interpretation.
While excluding NIKE, benchmark ratios are found from top
competitors and from the industry averages. After that, NIKE is added back in to
see where they stand. Finally, after finding this desired information, NIKE can
confidently proceed with forecasting its future.
LIQUIDITY RATIO ANALYSIS
Liquidity Analysis
2002 2003 2004 2005 2006 Evaluation
Current Ratio
2.27
2.32
2.71
3.18
2.8
Quick Asset Ratio
1.29
1.36
1.75
2.1
1.87 increase
Account Receivable Turnover
5.48
5.09
5.36
5.79
5.75 increase
Days
66.56 71.69
68
63
63.5 decrease
Inventory Turnover
4.37
4.29
4.21
4.03 decrease
Days
83.47 87.57
85
86.7
90.5 increase
Working Capital Turnover
4.26
3.5
3.15
3.16 decrease
4.17
4.01
increase
The liquidity ratios make it easy to comprehend how well a company
repays its current liabilities by analyzing the ability to maintain enough cash on
hand to meet their future debt. NIKE's quick asset ratio and current asset ratio
are favorable which gives the company the ability to convert its current liabilities
into liquid assets. In addition, NIKE improved their accounts receivable turnover,
thus minimizing the number of days of collecting accounts by three days.
Valuation of NIKE, Inc.
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Although, the company's inventory turnover was not as favorable as it decreased
from 4.37 to 4.03 causing an increase in days their products stayed in inventory.
Finally, working capital turnover was not favorable as well since there was an
increase in current assets which increased working capital. This increase in
working capital caused a decrease in working capital turnover.
PROFITABILITY ANALYSIS
Profitability Analysis
2002
Gross Profit Margin
0.393 0.4098 0.429 0.445
0.44 increase
Operating Expense Ratio
0.285
0.28 no change
Net Profit Margin
0.067 0.0443 0.077 0.088 0.093 increase
Asset Turnover
1.536
1.593
1.55
Return on Assets
.0983
0.179
.0787
0.119
.1198 .1378 .141 increase
0.197 0.214 0.221 increase
Return on Equity
2003
0.293
2004 2005 2006 Evaluation
0.43
0.29
1.56
1.52 no change
The various ratios used to determine the overall profitability convey
operating efficiency, asset productivity, return on assets and return on equity.
The operating efficiency shows different items from the income statement as a
percentage of sales. Overall, NIKE's operating efficiency was favorable as there
was an increase in gross profit margin; although there was not a substantial
change in the operating expense ratio the decrease is favorable. The net profit
margin increase is favorable as well. The asset turnover did not have that much
of a relevant change, but the return on assets and equity turned out to be
favorable. Profits increased allowing the return on equity and assets to increase.
Return on assets measures how the company changes their assets into profits.
Valuation of NIKE, Inc.
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CAPITAL STRUCTURE ANALYSIS
Capital Structure
Analysis
Debt to Equity Ratio
0.6775 0.6823
Times Interest Earned
22.435 29.039 61.988 394.5 -57.32 decrease
Debt Service Margin
5.544
2002
2003
2004
0.65
12.167 10.401
2005 2006 Evaluation
0.56
22.5
0.57 decrease
38.43 increase
The debt to equity ratio is a measure of how well NIKE uses their available
assets to cover their debt. This decrease in debt to equity indicates that NIKE did
not use as much money from the profits of their shareholders to pay for their
debt. Their credit risk is also evaluated using the debt to equity ratio, as Nike
shows they have less credit risk. As NIKE’s ratio decreased, their assets had to
increase to cover their liabilities, making them less credit risky. Times interest
earned did increase which means there is sufficient income from operations to
meet the necessary interest that is owed. The severe fluctuations in the times
interest earned was caused by the interest expense differences, particularly the
interest income expense in 2006. Since the interest expense was so low in 2005,
it caused a substantial increase in the times interest earned. In 2002, the notes
payable account was large enough to bring down the debt service margin to
5.544. Aside from that, the overall capital structure analysis was favorable due to
the decreases in the debt to equity ratio and times interest earned ratio.
INDIVIDUAL RATIO ANALYSIS
All of the following numbers for 2002 are not available and the numbers
for 2006 are an average from the previous years.
The graphs could be
misleading but are the closest numbers for comparison.
Valuation of NIKE, Inc.
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CURRENT RATIO
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
2.27
N/A
N/A
N/A
2003
2.32
5.86
N/A
5.86
2004
2.74
5.12
1.21
3.07
2005
3.18
6.67
3.81
5.24
2006
2.80
5.88
2.51
4.20
The current ratio is a ratio that shows the number of current assets,
assets that can easily be converted to cash, to the number of current liabilities,
liabilities that will be due within one year. When a company has a current ratio
larger than one, this is good, but a current ratio that is too large shows that the
company is not using its assets efficiently. Nike has a current ratio between 2
and 3 which is below the industry average but is still within a range that shows
they are able to pay off their current liabilities yet is low enough to show their
assets are being utilized. In the industry, NIKE is steadier and more stable
compared to the other competitors as their line in the graph is straighter. The
graph also shows that Nike is not moving or gaining any more or less assets than
any other company and has steady numbers over the years.
Valuation of NIKE, Inc.
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QUICK RATIO
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
1.30
N/A
N/A
N/A
2003
1.36
3.71
N/A
3.71
2004
1.75
3.75
0.50
2.12
2005
2.10
5.20
2.44
3.82
2006
1.87
4.22
1.47
2.84
The quick ratio shows a closer representation of assets that can be
liquidated more quickly with cash, short-term investments, and accounts
receivable being the accounts used for the asset portion of the ratio. This graph
shows many of the same things as the current ratio graph in that Nike is below
the Industry average yet still has a strong enough number to be acceptable. The
acceptable range for the quick ratio is between 1 and 1.8. Lower numbers are
not uncommon for this ratio since there are fewer assets being divided by the
same number of liabilities as the current ratio.
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ACCOUNTS RECEIVABLES RATIO
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
5.48
N/A
N/A
N/A
2003
5.09
7.95
N/A
7.95
2004
5.36
8.95
5.33
7.14
2005
5.79
10.90
5.29
8.09
2006
5.75
9.27
5.31
7.29
The account receivable ratio is used to determine how long a company
has a receivable before it is collected. The larger this number the less time it
takes the company to collect on the account. If the company has a receivable
turnover of 1 or lower this means that the company has as and equal amount of
receivable and sales or even worse more receivables. Nike has a receivable ratio
around 5.5. This translates to 66 days for Nike to collect their money on sales.
This number is lower than the industry average and is not growing at a rapid
pace. Slow rising numbers or a plateau are not bad but a decreasing number is
bad because fewer days to collect on receivables means quicker cash that can be
used in other places. We had difficulty finding reasonable benchmarks since
other top competitors, like Adidas and Reebok, are international firms on an
international market, different from NIKE. This is the reason we had to use
Kswiss and Under Armour for the benchmarks.
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INVENTORY TURNOVER
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
4.37
N/A
N/A
N/A
2003
4.17
3.19
N/A
3.19
2004
4.29
4.05
2.28
3.17
2005
4.21
4.43
2.71
3.57
2006
4.03
3.89
2.50
3.19
The inventory turnover will show how long a company keeps inventory before it
is sold. The number given by the ratio is not in days but can be converted easily
by dividing Inventory by the average Cost of Goods Sold per day.
Inventory
turnover is Cost of Goods Sold divided by Inventory. This ratio can be confusing
in that if the ratio is low this could be a sign of overstocking or a deficiency in the
product but a ratio that is high could be that the company has inadequate
inventory levels.
Nike has a fairly constant ratio around 4 which has been
declining slowly. There is no problem with a declining ratio in the case of Nike
because it is still above the Industry average but is not so high to raise
questions.
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WORKING CAPITAL TURNOVER
2002
4.26
N/A
N/A
N/A
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2003
4.01
2.42
N/A
2.42
2004
3.50
2.22
12.29
7.26
2005
3.15
1.91
2.10
2.00
2006
3.16
2.18
7.19
4.69
Working Capital Turnover is sales divided by working capital (current
assets-current liabilities).
This ratio is a measurement of dollars that are
generated from each dollar that is invested in working capital. A high number is
desired for this ratio showing that there is money coming from the money being
invested in working capital.
This graph is not an accurate representation
because the Industry average is skewed from the extremely high beginning ratio
from Under Armor. Nike and K-Swiss have more information and therefore gives
a better comparison. As shown Nike and K-Swiss do follow the same pattern
both having decreases followed by slow growth. We can make an assumption
since both companies follow a very similar pattern that the Industry average
Valuation of NIKE, Inc.
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would be closer to their lines than Under Armor and the Industry Average are
showing.
GROSS PROFIT MARGIN
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
0.39
N/A
N/A
2003
0.41
0.45
N/A
0.45
2004
0.43
0.46
0.47
0.46
2005
0.45
0.47
0.48
0.48
2006
0.44
0.46
0.47
0.47
The Gross Profit Margin is found by subtracting cost of sales from sales
and dividing this by sales. The graph shows that all the companies are very
similar and have not had any major decreases or increases from year to year.
This shows that sales and cost of sales has been very steady. Nike has a lower
GPM than the other companies which indicate it could be obtaining and
producing its products at a lower cost or Nike may be able to demand a higher
price premium since their products are seen as unique.
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OPERATING EXPENSE RATIO
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
0.29
N/A
N/A
N/A
2003
0.29
0.24
N/A
0.24
2004
0.30
0.25
0.34
0.30
2005
0.29
0.25
0.36
0.30
2006
0.28
0.25
0.35
0.30
This ratio is found by dividing the operating expenses by sales.
The
number found by this ratio will be a decimal but actually represents the
percentage of revenue used for operations. As shown by the graph Nike uses
around 30% of its revenue for operating expenses. Nike’s 30% is very close to
the Industry average so can be seen as a positive.
This shows that most
companies in the Industry are using around the same amount of their revenues
to pay for their operations.
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NET PROFIT MARGIN
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
0.07
N/A
N/A
N/A
2003
0.04
0.12
N/A
0.12
2004
0.08
0.15
0.08
0.11
2005
0.09
0.15
0.07
0.11
2006
0.09
0.14
0.07
0.11
The Net Profit Margin is a measure of profitability dividing Net Income by
revenues.
This is another ratio that is expressed in a percentage which
represents how much the company actually gets to keep after production costs
and taxes. It is a representation of the companies pricing policy and/or how well
a company is able to control cost. This graph shows that in the early years Nike
had a low Net Profit Margin but has been steadily increasing to present day
where they are much closer to the Industry average.
Nike has a Net Profit
Margin of around 9%. Nike had its lowest profit margin in 2003 where they may
have tried a new pricing policy or were not as efficient in controlling their cost.
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ASSET TURNOVER
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
1.54
N/A
N/A
N/A
2003
1.59
1.83
N/A
1.83
2004
1.55
1.64
1.85
1.74
2005
1.56
1.51
1.38
1.44
2006
1.52
1.66
1.61
1.64
This ratio shows how much revenue a company is able to generate from the
amount of assets it has. Asset Turnover is sales divided by total assets. The
graph shows that all competitors and Nike are staying very close to the Industry
average. In the earlier years all competitors had a higher Asset Turnover but
have been on the decline until recently. A higher asset turnover would be nice
for Nike because this would mean they are utilizing all of their assets.
Valuation of NIKE, Inc.
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NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
9.8%
15.6%
9.5%
11.6%
2003
7.9%
22.9%
10.4%
13.7%
2004
12%
24.2%
14.4%
16.9%
2005
13.8%
22.4%
9.7%
15.3%
2006
14.1%
21.3%
11%
14.4%
Return on assets is a measure of the revenue produced by the dollar
amount of assets invested. The ROA for Nike is substantially lower than the
Industry average in the earlier years but is shows positive growth. Nike being
lower than the Industry average is not surprising since their net profit margin
and asset turnover (ROA= net profit margin x asset turnover) were both lower
than the Industry average.
Since the graphing is in an upward trend the
operating performance is improving. In relation to ROE, both have steadily
increased along with the industry, and the ROA is lower than ROE. This number
is expected to be lower than ROE since the ratio involves total assets; total
assets should be larger than total equity, making the ratio smaller.
Valuation of NIKE, Inc.
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NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
17%
21%
98%
43%
2003
12%
28%
48.00%
28%
2004
20%
31%
77%
54%
2005
21%
27%
13%
20%
2006
22%
29%
45%
37%
Return on Equity is a measure of how well the funds are being used to
generate returns for the shareholders and their investment.
This graph is
skewed because of the extremely high ROE of Under Armour in the year 2002
(the first publicly traded year). Nike’s ROE is beginning to plateau at a little
above .2 where many large companies in the United States are usually at .11 to .
13 in the long run. Again, the information seems non-comparable from Under
Armour and Kswiss compared to NIKE’s other competitors, such as Adidas and
Reebok because of the international market. The information from Kswiss and
Under Armour was not as consistent as the other competitors may have been.
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DEBT-TO-EQUITY RATIO
NIKE
KSWISS
UNDER ARMOUR
INDUSTRY AVG.
2002
0.68
N/A
N/A
N/A
2003
0.68
0.31
N/A
0.31
2004
0.65
0.30
4.23
2.26
2005
0.56
0.22
0.35
0.29
2006
0.57
0.28
2.29
1.28
This ratio is a measure of the amount of debt a company has compared to
the equity of that company. The Industry average has been skewed in 2004 by
the high ratio of Under Armor therefore making it a non-comparable. K-Swiss
and Nike have very similar debt to equity ratio patterns in this graph which can
produce the assumption the rest of the industry would have a similar pattern.
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NKE
STATEMENT FORECASTING
METHODOLOGY
Because forecasting for the future is some what of an unpredictable and
intricate study, we tried to keep our calculations and methods as simple as
possible. This way, instead of being distracted by excess details that are not
necessary, we can keep all of our attention on what the future looks like for our
company. We have conducted a 10 year line – item forecast for each of our
financial statements by using an uncomplicated five year moving average. This
way we can easily detect the common trend of each important line item. The
forecast percentages and figures came from taking the average of the previous
five years for the next year in question. Computing the figures this way made our
information consistent.
We feel it is truly important to do an overall, comprehensive forecast
including our income earnings, cash flows, and balance sheet. Even if we were
only interested in one component of performance such as sales or profit margin,
the background and support from the rest of the forecasts will be stronger and
more reliable. Linking forecasts of such amounts to sales forecasts helps avoid
internal inconsistencies; however it would do us no good to look at a sales ratio
if we had nothing else to relate with which to relate. Computing overall items
will safeguard against any unrealistic or unspoken assumptions. Because of this
decision, we are given more reason to keep gathering our ratios from the five
year moving averages. If we keep that aspect very consistent, we think it will
keep our guesses to a minimum, as well as helpfully prevent a cluttered web of
assumption after assumption that can lead to forecast distortion. We continued
with these identical calculations with all of the figures for the 10 years of
estimates.
With any form of estimation and/or information gathering, there will
always be strengths and weaknesses along with limitations.
Valuation of NIKE, Inc.
Some of the
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restrictions that we face while making these forecasts include the obvious point
that no one can 100% predict everything correctly. While we can get extremely
close to real life numbers as they happen, we could also be completely wrong
and be set back from mistaken preparation. Another limitation that we face is
the quality of disclosure that is presented to us in the filings. There could be
matter that is entirely left out or even items that are presented but are not
accurate. Our strengths relate to our methods trying to keep things as simple as
possible. Since we focused on keeping a minimum amount of assumptions, we
can more easily portray NIKE’S future forecasts with a lesser amount of
interference or deformation. Another strength we uphold is by using the moving
averages, as long as there are no significant external changes or policy changes
that take place in the next 10 years, our method’s simplicity we enable us to
forecast a longer, more precise future. Finally, as we all know, all strengths must
be accompanied by weaknesses. Our primary weakness deals with the fact that
the future is in no way completely predictable. Our moving average ratios do not
leave room for any unexpected change that could happen in the future. Ten
years is a long time in which many things could be the cause of a big adjustment
with one thing or the other. Although we have disadvantages that accompany
our forecasting methods, NIKE remains very confident in its strengths.
NKE
WEIGHTED AVERAGE
COST OF CAPITAL
NIKE’s weighted average cost of capital (WACC) is very important because
it is the average rate of interest that NIKE pays to finance all of its assets. This
cost of capital may be paid in the form of interest to their lenders or to their
shareholders in the form of dividends.
Either way, it costs money to make
money. The NIKE’s WACC is how much they pay to retain and purchase new
assets.
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COST OF DEBT (Kd). It is important to know a firm’s cost of debt because it can
give you an idea on the creditworthiness of a firm. If a firm is borrowing at
double the prime rate, it is likely a very risky firm. Banks who have seen their
financial data deem them to be less reliable than a firm they would lend to at
prime rate. This could be because the firm is a new firm, they are investing their
assets into risky projects, or because they are nearing bankruptcy.
NIKE, Inc. is a longstanding, credible firm.
They have established
themselves as a prime competitor and penetrated their market effectively. NIKE
also has many assets to back up their loans. They are at a low risk for lenders.
COST OF EQUITY (Ke). The cost of equity is how much it costs to persuade
investor to give a firm their money. When a firm’s stock price has remained
stagnant for a while – experiencing neither dramatic increases or decreases – it
can entice investors to invest their money by paying dividends. A longstanding,
stable firm may not experience a dramatic increase in stock prices for a long
time. When investors feel they will not be making much money by investing in a
firm, they will not invest. However, if a firm of this nature pays dividends to its
stockholders on a regular basis then more stock holders will be inclined to invest
because of hopes of receiving dividends.
It should be noted that paying dividends to common stock holders is not
required and is done specifically to entice new investors. This means there is
always the risk that a firm will not pay dividends even if they have a long
standing record of paying them (as NIKE does). Because of this risk, they must
pay higher levels of dividends to satisfy the investors.
NIKE has a history of paying dividends to their common stock holders.
They are able to pay dividends with confidence because they continue to turn a
profit every quarter. They also are forecasted to continue to turn a profit in the
future. If they have a constant history of turning a profit and furthermore paying
dividends because of their large profits, then investors will feel confident that
they will receive dividend payments from NIKE once they become a stockholder.
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COST OF CAPITAL. To determine NIKE’s cost of capital we first determined their
cost of debt and equity. We computed their respective weights, multiplied them
by their cost, and added them together. Below is a 5-year history of NIKE, Inc.’s
cost of debt, cost of equity, and weighted average cost of capital (WACC).
2002
2003
2004
2005
2006
Kd
2.00%
2.25%
1.40%
0.41%
3.37%
Ke
6.95%
6.95%
7.80%
8.25%
7.89%
WACC
5.84%
6.14%
6.85%
7.31%
7.43%
We will use these cost of capital computations throughout the remainder
of this valuation. Cost of debt seems to be low because NIKE discloses their net
interest expense which includes their interest income. Including their interest
income would make their cost of capital significantly lower than not including it.
However, it is valid to include their interest income into these computations
because the interest they earn off of lending their assets or keeping cash money
in the bank means they have to borrow less money to finance their assets. It
offsets some of their other liabilities.
NIKE’s weighted average cost of capital seems to be a steady, strong rate.
Over the past five years, as the chart above shows, NIKE’s cost of capital has
steadily increased. However, we do not attibute this to NIKE being a less creditworthy or riskier firm. We attribute this to international interest rates steadily
rising. The graph below shows NIKE’s cost of capital rate for each year with
each year’s respective London Inter-Bank Offer Rate, and with the prime rate.
Both the LIBOR and prime rates are the June 1 of the respective year rates.
The graph shows that NIKE’s WACC has grown less than both the LIBOR
and the prime rate. It also shows the prime rate exceeding NIKE’s WACC for
fiscal year 2006. NIKE has an extremely favorable cost of capital if it is below
the prime rate. Most banks lend over the prime rate.
Cost of capital should not be looked at over time without comparison with
other international offer rates. This is because a firm’s cost of capital could rise
Valuation of NIKE, Inc.
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significantly but it could be at no fault to the firm. If interest rates around the
globe are rising at the same amount or more, then the firm’s real WACC has not
increased. The firm will be paying more money out to borrow money, but not
relative to the other firms in the industry. This means that an increasing WACC
because of increasing world interest rates would not put the firm at a disposition
to other firms in the same industry because it is likely their WACC would rise by
the same amount, if not more.
CAPITAL ASSET PRICING MODEL
The CAPM (Capital Asset Pricing Model) is basically a model to measure
the cost of equity that expresses the cost of equity as the sum of a required
return on risk less assets plus a premium for systematic risk. Using the CAPM
the cost of equity was found to be .01058 or 1.058 percent which is some what
low. The numbers that are found using the CAPM will later be used in a WACC
analysis (Weighted Average Cost of Capital).
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NKE
DISCOUNTED
FREE CASH FLOWS
The Discounted Free Cash Flows (DCF) valuation model is calculated by
computing the present value of future cash flows. After forcasting ten years, we
examined financial data from NIKE’s statement of cash flows. To compute the
discounted free cash flows, we used each year’s cash flows from operating
activities and cash flows (used) from investing activities.
Our model says that the market over values NIKE, Inc. by just over $3 per
share. Our DCF model ended up with a value for NIKE of $152.24 per share.
However, the actual market price per share was $80.31.
At a difference of
$71.93 per share and 256 million shares out standing, that makes NIKE, Inc.
undervalued.
NKE
LR ROE
RESIDUAL INCOME
The valuations that we found for the long run return on equity are an
actual perpetuity based on the model of residual income. This measurement of
return on equity is useful in comparing the profitability of NIKE to that of other
firms in the same industry of apparel and textile accessories.
We concluded that our firm was fairly correctly valued as we generated a
price of $79.53 as NIKE’s estimated value, and the actual price per share was
$80.31. As we found the beginning equity for each year, we used it for each year
after that to derive the return on equity for each consecutive year after 2006.
With these values, we ended up with the estimated price per share to be $79.53.
Since the ROE depends on how well a company uses its money invested, it is a
positive thing if the firm has a high ROE. The company reveals how much profit
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it generates with the money shareholders have put into the company. In
comparison, if a company’s ROE is not high, it shows that they do not use their
money wisely to spend on their own company; the money put into the firm is not
used to their advantage to make profits. We learned through the ROE model,
that NIKE does use their equity wisely.
In the ROE valuation, we used various sorts of information to compute the
final result. For the Ke, we used 7.89% in NIKE’s valuation model to compute the
ROE as well as the equity calculated from an equation we used for each year.
Subsequently, as we found the ROE for each year, we also found the growth in
BVE steadily increasing. It is a good thing if NIKE’s equity value increases each
year, as it indicates that they can use more of what they invested to generate
profits and growth of the company. The more NIKE grows, the more attractive it
is for investors to invest their money into the company to do well in the industry.
NKE
ABNORMAL
EARNINGS GROWTH
The abnormal earnings growth valuation values the company based on
earning per share and dividends paid per share. The link between earnings per
share and dividends per share is what enables us to value a firm based on these
attributes.
Generally, there is a positive correlation between earnings and
dividends per share. If earnings per share increase, often dividends per share
increase.
NIKE, Inc.’s earnings per share are forecasted to increase steadily over the
next ten years. They will see their most significant rise in 2014 when it will jump
from $14.90 in 2013 to $17.23. Dividends per share do not change at a steady
increase or decrease. DPS starts at a price of $1.14 in 2006 and will decrease to
$0.76 in 2007. It increases the next three years to $0.81 in 2008, $0.87 in 2009,
and $0.90 in 2010 where it will hold steady for the next year. The dividends per
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share will fall to $0.85 in 2012. However, DPS will rise in the next two years to
$0.86, and $0.87 in 2013 and 2014 respectively. EPS rose by $0.80 to $5.28. In
the coming ten years, NIKE’s earning per share will rise from $5.44 to $17.23.
Since there is such a large expected increase in earnings per share, it is expected
to have one or two different stock splits. There have been three 2/1 stock splits
since 1980.
However, when the cost of equity, 7.89%, is factored into the abnormal
earnings growth model, the resulting value is $96.90 per share.
This is a
difference of $16.59 from the book value of $80.31. The AEG valuation shows
that the market significantly over-values NIKE. Hopes of future growth could be
what cause the public to purchase shares at an overvalued price.
Core EPS
Total PV of AEG
PV of Terminal Value
Total PV of AEG
Total Average EPS Perp (t+1)
Capitalization Rate (perpetuity)
Value Per Share
NKE
METHOD OF
COMPARABLES
$5.44
$4.35
$5.49
$9.84
$15.28
0.0789
$96.90
The following ratios are very important in valuing a firm’s worth. They are
also useful when compared to other firms in the industry. In keeping with the
rest of this valuation, we will compare NIKE, Inc. with the Under Armour and KSwiss apparel and sportswear companies.
PRICE PER SHARE/EARNINGS PER SHARE. The price per share/ earnings per
share ratio is most importantly used to compare the value of stocks of different
companies. This ratio measures how expensive or cheap a companies share price
is. This is important because the amount a company earns per share
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accumulates to the total wealth. The lower the P/E ratio is, the less expensive
the price of a share of stock. The less expensive stock is more attractive to
investors looking to buy shares of stock.
The higher the P/E ratio, the company is most likely over-valued compared
to other companies in the same industry. Management has a higher incentive to
create the stock at the right price because management is paid primarily from
the company’s stock prices. NIKE’s P/E ratio is calculated at 18.84 while the
industry average is 19.59. Under Armor’s P/E ratio is 50.11 which most likely
means that the company is over-valued. Because NIKE has a lower ratio, this
means that the stock price is not too high and is desirable to investors.
PRICE PER SHARE/BOOK VALUE PER SHARE.
The market to book ratio is also
known as the price per share/ book value per share ratio. This ratio shows how
liquid a company is and how much would be left over if a company went
bankrupt. The purpose of this ratio is to compare the market value to the value
of equity, or the value of total assets minus total liabilities. This ratio is calculated
by dividing the current value of stock by the amount of common stockholders
equity per share. The lower the P/B ratio, the company is said to be undervalued. The industry P/B ratio is 3.96. K-Swiss has a P/B ratio of 3.48 while
Under Armor has a P/B ratio soaring at 11.56. NIKE has a P/B ratio of 3.98,
which is just above the industry average. Since NIKE is just about at the industry
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average, this means that NIKE’s P/B is not under-valued or over-valued.
Investors should want to buy this stock because it will remain a strong
competitor of the industry.
DIVIDENS PER SHARE/PRICE PER SHARE. The dividends per share/ price per
share ratio is also known as the dividend yield. This ratio is an indication of the
amount of income caused by a share of stock. Not only does the dividend yield
reflect on the company but also the industry as a whole. The dividend yield for
the entire industry is calculated by adding each average dividend price by the
entire cumulative stock prices. An investor would think this is important because
not only would the investor know information on the specific company, but also
how the industry is performing as a whole. A higher yield is more desirable to
investors because it is under-priced, so it would be wise to invest.
[PRICE/EARNINGS] / 1-YEAR AHEAD EARNINGS GROWTH RATE.
Otherwise
known as the PEG ratio, dividing the price to earnings ratio by the year over year
earnings growth rate is included in the method of comparables as well. This is
yet another, more extensive way of valuing the firm. It is a positive sign that
NIKE’s PEG ratio is a low number. This is provides our investors with a cheaper
price per unit of earnings growth. However, NIKE’s figure still lies higher than
Valuation of NIKE, Inc.
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our two valued competitors.
This requires investors to prioritize different
financial values that affect their success.
PRICE PER SHARE / SALES. The price per share/ sales ratio is calculated by
dividing the current price of stock for a company by the amount of sales or
revenue that the company received. This ratio compares information to other
companies, the industry as a whole, or even past performance of the same
company. The P/S ratio can differ significantly from company to company so it is
more useful when it is compared with companies with similar sales. For instance,
it would not be useful to compare NIKE with McDonalds because it would be
comparing two different types of companies. This ratio can be deceiving because
it does not take into account any debt or expenses. When NIKE is compared with
its competitors and the industry, NIKE has the lowest P/S ratio. Under Armor has
a P/S ratio of 5.94. K-Swiss has a ratio of 2.38, while the industry has a P/S ratio
of 1.78. NIKE is below the industry average with a P/S ratio of 1.59.
PRICE / EARNINGS BEFORE INTEREST AND TAXES. When dividing the price per
share by EBIT, the resulting value provides very similar information given by the
price earnings ratio. It gives NIKE a significant indicator that shows the number
of times the market price exceeds the earnings per share (before any effects of
interest and taxes). EBIT is a very considerable portion of this ratio because it
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shows NIKE’s ability to pay off creditors therefore is observed very closely. This
particular ratio gives highly beneficial information coming from various aspects of
our statements. We want each of our investors, creditors, and shareholders to
be as informed as possible.
PRICE/EARNINGS
AMORTIZATION.
BEFORE
INTEREST,
TAXES,
DEPRICIATION,
AND
The price per share of a firm over it’s EBITDA value is
important because it compares the earnings with each dollar of stock equity.
This ratio is similar to price/ebit but does not include in depreciation and
amortization expenses. This is an important difference because depreciation and
amortization are not recognized on a cash basis. Earnings before depreciation
and amortization show a more real value of what earnings are. However, these
cannot be considered net earnings.
NIKE is significantly lower than industry leader Under Armour (UARM),
however they are slightly higher than competitor K-Swiss (KSWS).
It is also
lower than the industry average. However, it is our opinion that the extreme
Under Armour skews the industry average. The reason they are so out of the
norm on all the ratios is because they just recently went public and experienced
exponential growth because of it.
Valuation of NIKE, Inc.
56 of 59
PRICE/FREE CASH FLOWS. A firm’s free cash flows are important because it
means nothing for a firm to have a high net income if they have no cash flows to
build upon. Free cash flows show how much cash the firm has at its disposal.
The price to free cash flows ratio shows how much actual cash can be generated
per dollar of stock equity. This is different from net income or earnings because
net income and earnings do not completely dictate free cash flows. For example,
one could have a negative net income but a positive free cash flows. This is
because non-cash expenses, like depreciation and amortization, are not counted
in free cash flows.
The industry leader for ratios, Under Armour, did not have a Price/Free
Cash Flows ratio. NIKE, Inc. shows significantly lower than the industry average,
as was K-Swiss’.
Valuation of NIKE, Inc.
57 of 59
NKE
FINAL
RECOMMENDATION
NIKE is an apparel company that is well recognized in all parts of the
United States and around the world. Whether a person is playing pick up games
in the back yard or making a run for a world championship Nike has been part of
their lives in some manner.
With their equipment and clothing, super-start
athlete endorsements, world renown Nike Swoosh, and close financial analysis
the conclusion is that Nike is an under valued firm that has a “buy”
recommendation. The ratios computed for Nike showed that they have a strong
position regarding their assets to liabilities, debt to equity, and other crucial ratio
calculations. When the forecast is evaluated the conclusion can be made that
Nike will have a steady growth and retain their strong position in the athletic and
apparel industry.
When compared to other companies in the industry Nike
outperforms in most areas.
In conclusion these are the reasons the Nike
Company has been given an undervalued valuation and a buy recommendation.
This is a confident analysis not withstanding Nike change management,
accounting policies or standards.
Valuation of NIKE, Inc.
58 of 59
NKE
REFERENCES
COACH Inc. (2006). Form 10-K July 1, 2006.
Retrieved October 3, 2006, from, Deloitte & Touche LLP.
http://
finance.yahoo.com/q/sec?s=coh
(2006) “Hoover’s Inc” Retrieved October 3, 2006.
http://www.hoovers.com/free/
K-Swiss Inc. (2006). Form 10-K February 9, 2006.
Retrieved October 3, 2006, from, GRANT THORNTON LLP.
http://
finance.yahoo.com/q/sec?s=ksws
Larson, Annette. (2006) “MORNINGSTAR” Retrieved October 3, 2006.
http://corporate.morningstar.com/
(2006) “nikebiz.com the inside story” Retrieved October 3, 2006.
http://www.nike.com/nikebiz/nikebiz.jhtml?page=0
NIKE Inc. (2006). Form 10-K July 28, 2006.
Retreived October 3, 2006, from P RICEWATERHOUSE C OOPERS
LLP.
http://finance.yahoo.com/q/sec?s=NKE
SKECHERS U.S.A. Inc. (2005). Form 10-K December 31, 2005.
Retrieved October 3, 2006, from, KPMG LLP.
http://finance.yahoo.com/
q/sec?s=skx
(1996-2006) “VentureLine” Retreived October 3, 2006.
http://www.ventureline.com/
Valuation of NIKE, Inc.
59 of 59
NKE
APPENDICES
nc. - Balance Sheet
2002
ASSETS
NT ASSETS:
d cash equivalents
$575.5
ts receivable
$1,804.1
ries, net
$1,373.8
d income taxes
$140.8
expenses and other assets
$260.5
rrent assets
$4,154.7
y and equipment, net
$1,614.5
d income taxes
$140.8
ll
$232.7
otal Current Assets
$4,154.7
on Current Assets
$2,285.3
ASSETS
$6,440.0
ITIES AND EQUITY
NT LIABILITIES:
ts payable
$504.4
d liabilities
$765.3
taxes payable
$83.0
portion of long-term debt
$55.3
rrent liabilities
$1,833.2
d income taxes and other liabilities
$141.6
rm debt
$625.9
LIABILITIES
$2,600.7
HOLDERS EQUITY:
n stock
$2.8
n excess of stated value
$538.7
d earnings
$3,495.0
ulated other comprehensive income (loss) $192.4
areholders equity
$3,839.0
LIABILITIES AND SHAREHOLDERS EQUITY
$6,440.0
2003
2004
2005
2006
$643.0
$2,101.1
$1,514.9
$163.7
$266.2
$4,679.9
$1,620.8
$163.7
$65.6
$4,679.9
$2,034.0
$6,713.9
$828.0
$2,120.2
$1,650.2
$165.0
$364.4
$5,528.6
$1,611.8
$165.0
$135.4
$5,528.6
$2,380.1
$7,908.7
$1,388.1
$2,262.1
$1,811.1
$110.2
$343.0
$6,351.1
$1,605.8
$110.2
$135.4
$6,351.1
$2,442.5
$8,793.6
$954.2
$2,395.9
$2,076.7
$203.3
$380.1
$7,359.0
$1,687.7
$203.3
$130.8
$7,359.0
$2,510.6
$9,869.6
$572.7
$1,054.2
$107.2
$205.7
$2,015.2
$156.1
$551.6
$2,722.9
$780.4
$979.3
$118.2
$6.6
$2,030.5
$413.8
$682.4
$3,126.7
$843.9
$984.3
$95.0
$6.2
$1,999.2
$462.6
$687.3
$3,149.1
$952.2
$1,286.9
$85.5
$255.3
$2,623.3
$550.1
$410.7
$3,584.1
$2.8
$589.0
$3,639.2
$239.7
$3,990.7
$6,713.9
$2.8
$887.8
$3,982.9
($86.3)
$4,781.7
$7,908.7
$2.8
$1,182.9
$4,396.5
$73.4
$5,644.2
$8,793.6
$2.8
$1,451.4
$4,713.4
$121.7
$6,285.2
$9,869.6
sts
2007
153
137
685
157
323
615
628
157
140
932
644
576
731
014
$98
106
400
345
592
913
2.8
930
113
174
663
576
2008
2009
$1,266 $1,390
$2,203 $2,224
$1,748 $1,794
$160
$159
$335
$349
$5,907 $6,152
$1,631 $1,633
$160
$159
$121
$133
$8,708 $9,561
$2,903 $3,187
$11,611 $12,748
2010
2011
2012
2013
2014
2015
2016
$1,526
$2,244
$1,823
$158
$346
$6,277
$1,637
$158
$132
$10,497
$3,499
$13,996
$1,675
$2,241
$1,825
$167
$347
$6,262
$1,643
$167
$131
$11,524
$3,841
$15,366
$1,839
$2,210
$1,775
$160
$340
$6,042
$1,634
$160
$131
$12,653
$4,218
$16,870
$2,019
$2,224
$1,793
$161
$343
$6,128
$1,636
$161
$130
$13,891
$4,630
$18,522
$2,217
$2,229
$1,802
$161
$345
$6,172
$1,637
$161
$131
$15,251
$5,084
$20,335
$2,434
$2,230
$1,804
$161
$344
$6,176
$1,637
$161
$131
$16,744
$5,581
$22,326
$2,672
$2,227
$1,800
$162
$344
$6,156
$1,638
$162
$131
$18,384
$6,128
$24,512
$817
$1,066
$99
$98
$2,400
$431
$591
$4,717
$824
$1,083
$96
$116
$2,400
$435
$573
$5,178
$820
$1,103
$96
$138
$2,400
$429
$550
$5,685
$793
$1,066
$98
$115
$2,400
$405
$578
$6,242
$806
$1,076
$98
$117
$2,400
$417
$576
$6,853
$812
$1,079
$97
$117
$2,400
$424
$574
$7,524
$811
$1,081
$97
$121
$2,400
$422
$570
$8,261
$808
$1,081
$97
$121
$2,400
$419
$570
$9,069
$2.8
$2.8
$1,008 $1,092
$6,559 $7,209
$186
$205
$7,315 $8,031
$11,611 $12,748
$2.8
$1,133
$7,930
$225
$8,817
$13,996
$2.8
$1,123
$8,773
$249
$9,681
$15,366
$2.8
$1,057
$9,755
$277
$10,628
$16,870
$2.8
$1,083
$10,889
$309
$11,669
$18,522
$2.8
$1,098
$12,038
$342
$12,811
$20,335
$2.8
$1,099
$13,310
$378
$14,065
$22,326
$2.8
$1,092
$14,722
$418
$15,442
$24,512
$776
$1,064
$101
$116
$2,400
$385
$585
$4,296
Inc. - Income Statement
s
ales
ofit
g expenses:
nd administrative
g income
xpense, net
before provision for income taxes
for income taxes
me
2002
2003
2004
$9,893.0 $10,697.0 $12,253.1
$6,004.7
$6,313.6
$7,001.4
$3,888.3
$4,383.4
$5,251.7
$2,835.8
$1,067.9
$34.0
$1,017.3
$349.0
$663.3
$3,154.1
$1,245.8
$28.8
$1,123.0
$382.9
$474.0
$3,702.0
$1,549.7
$25.0
$1,450.0
$504.4
$945.6
2005
$13,793.7
$7,624.3
$6,115.4
2006
$14,954.9
$8,367.8
$6,587.0
$4,221.7
$1,893.7
$4.8
$1,859.8
$648.2
$1,211.6
$4,477.8
$2,109.2
($36.8)
$2,141.6
$749.6
$1,392.0
s
007
419
459
960
890
438
11
426
832
594
2008
2009
2010
2011
2012
2013
2014
2015
2016
$18,026 $19,791 $21,729 $23,856 $26,191 $28,756 $31,571 $34,662 $38,055
10,385
11,402
12,518
13,743
15,089
16,566
18,188
19,969
21,923
7,641
8,389
9,211
10,113
11,103
12,190
13,383
14,693
16,132
5,369
2,817
7
2,811
964
1,846
5,894
3,256
2
3,254
1,116
2,137
6,471
3,763
-2
3,765
1,292
2,473
7,105
4,349
-4
4,352
1,493
2,859
7,800
5,026
3
5,023
1,723
3,300
8,564
5,808
1
5,807
1,992
3,815
9,403
6,712
0
6,712
2,303
4,410
10,323
7,758
-1
7,758
2,662
5,097
11,334
8,965
0
8,966
3,076
5,890
E, Inc. - Statement of Cash Flows
2002
2003
FLOWS FROM OPERATING ACTIVITIES:
come
$663.3
$474.0
ments to reconcile net income to net cash provided by operating activities:
iation and amortization
$271.6
$262.5
nefit related to exercise of stock options
$13.9
$12.5
ed income taxes, net
$15.2
$50.4
es in assets and liabilities, net of effects of business acquisitions:
nts receivable
($135.2)
($136.3)
ries
$55.4
($102.8)
sh provided by operating activities
$1,081.5
$917.4
FLOWS FROM INVESTING ACTIVITIES:
ns to PPE and other
($282.8)
($185.9)
als of PPE and others
$15.6
$14.8
Liabilities
($6.9)
$1.8
assets
($28.7)
($46.3)
sh used in investing activities
($302.8)
($215.6)
FLOWS FROM FINANCING ACTIVITIES:
ds from long term debt issuance
$329.9
$90.4
Payable, Long term debt including current portion
($371.5)
($405.7)
nds
($128.9)
($137.8)
ceeds from proceeds from exercise of stock options and other stock
$59.5
issuances$44.2
hase of stock
($226.9)
($196.3)
sh used in financing activities
($478.2)
($605.2)
of exchange rate changes on cash
($29.0)
($38.1)
rease in cash and cash equivalents
$271.5
$58.5
nd cash equivalents, beginning of period
$304.0
$575.5
nd cash equivalents, end of period
$575.5
$634.0
emental cash flow information:
paid during the year for:
t
$54.2
$38.9
taxes (net of refunds received)
$262.0
$330.2
2004
2005
2006
$945.6
$1,211.6
$1,392.0
$313.5
$47.2
$19.0
$287.7
$63.1
$21.3
$290.9
$54.2
-$26.0
$97.1
($55.9)
$1,518.5
($93.5)
($103.3)
$1,570.7
($85.1)
($200.3)
$1,667.9
$214.8
$11.6
($4.1)
($53.4)
($950.6)
$257.1
$333.7
$7.2
$1.6
$11.1
($4.3)
($39.1)
($30.3)
($360.4) ($1,276.6)
$153.8
($206.9)
($179.2)
$253.6
($419.8)
($398.5)
$24.6
$194.0
$634.0
$828.0
$0.0
($90.9)
($236.7)
$226.8
($556.2)
($657.0)
$6.8
$560.1
$828.0
$1,388.1
$0.0
($24.2)
($290.9)
$225.3
($761.1)
($850.9)
$25.7
($433.9)
$1,388.1
$954.2
$37.8
$418.6
$33.9
$585.3
$54.2
$752.6
sts
94
2008
1,846
2009
2,137
2010
2,473
2011
2,859
2012
3,300
2013
3,815
2014
4,410
2015
5,097
2016
5,890
6
2
0
$326
$43.0
$16.1
$327
$49.1
$9.3
$327
$49.5
$7.3
$329
$46.8
$4.5
$327
$45.3
$10.7
$327
$46.8
$9.6
$327
$47.5
$8.3
$327
$47.2
$8.1
$328
$46.7
$8.2
9
1)
2
($67)
($109)
$2,056
($20)
($110)
$2,392
($21)
($121)
$2,716
$4
($124)
$3,119
$31
($109)
$3,605
($15)
($115)
$4,069
($4)
($116)
$4,673
($1)
($117)
$5,361
$3
($116)
$6,159
6)
2
5)
6)
1)
($326)
$9.1
$0.8
($41.7)
($685)
($327)
$7.9
$0.6
($40.8)
($779)
($327)
$7.2
$1.5
($38.3)
($744)
($329)
$7.2
($0.4)
($38.1)
($821)
($327)
$8.3
$0.4
($39.7)
($730)
($327)
$7.9
$0.6
($39.7)
($752)
($327)
$7.7
$0.6
($39.3)
($765)
($327)
$7.7
$0.6
($39.0)
($763)
($328)
$7.8
$0.4
($39.2)
($766)
8
8)
5)
2
2)
5)
0)
9)
4
3
$71.8
($189.5)
($208)
$182
($473)
($208)
$3.4
($113)
$1,153
$1,266
$68.1
($146.3)
($222)
$210
($528)
($222)
$11.7
($124)
$1,266
$1,390
$50.9
($134.1)
($230)
$201
($550)
($230)
$9.1
($136)
$1,390
$1,526
$61.1
($142.8)
($229)
$196
($549)
($229)
$9.6
($149)
$1,526
$1,675
$73.4
($166.5)
($217)
$190
($507)
($217)
$6.4
($164)
$1,675
$1,839
$65.1
$63.7
($155.8) ($149.1)
($221)
($224)
$196
$199
($521)
($531)
($221)
($224)
$8.0
$9.0
($180)
($198)
$1,839 $2,019
$2,019 $2,217
$62.8
($149.7)
($224)
$197
($532)
($224)
$8.4
($217)
$2,217
$2,434
$65.2
($152.8)
($223)
$196
($528)
($223)
$8.3
($238)
$2,434
$2,672
44
32
42
964
42
1,116
43
1,292
45
1,493
43
1,723
44
2,662
44
3,076
43
1,992
43
2,303
E, Inc. - Common Size Balance Sheet
ASSETS
NT ASSETS:
nd cash equivalents
ts receivable
ries, net
d income taxes
expenses and other assets
urrent assets
Total Current Assets
y and equipment, net
d income taxes
ll
ASSETS
Non-Current Assets
ILITIES AND SHAREHOLDERS EQUITY
NT LIABILITIES:
ts payable
d expenses and other current liabilities
taxes payable
portion of long-term debt
urrent liabilities
d income taxes
rm debt, net of current portion
LIABILITIES
ITMENTS AND CONTINGENCIES
HOLDERS EQUITY:
ed stock
n stock
nal paid-in capital
d earnings
lated other comprehensive income (loss)
hareholders equity
LIABILITIES AND SHAREHOLDERS EQUITY
2002
2003
2004
2005
2006
8.94%
28.01%
21.33%
2.19%
4.05%
64.51%
9.58%
31.29%
22.56%
2.44%
3.96%
69.70%
10.47%
26.81%
20.87%
2.09%
4.61%
69.91%
15.79%
25.72%
20.60%
1.25%
3.90%
72.22%
9.67%
24.28%
21.04%
2.06%
3.85%
74.56%
25.07%
24.14%
7.83%
11.88%
1.29%
0.86%
28.47%
2.20%
9.72%
40.38%
8.53%
15.70%
1.60%
3.06%
30.02%
2.33%
8.22%
40.56%
20.38%
18.26%
17.10%
2.09%
1.25%
2.06%
0.98%
1.71%
1.54%
1.33%
100.00% 100.00% 100.00% 100.00% 100.00%
35.49% 30.30% 30.09% 27.78% 25.44%
9.87%
12.38%
1.49%
0.08%
25.67%
5.23%
8.63%
39.53%
9.60%
11.19%
1.08%
0.07%
22.73%
5.26%
7.82%
35.81%
9.65%
13.04%
0.87%
2.59%
26.58%
5.57%
4.16%
36.31%
0.04%
0.04%
0.04%
0.03%
0.03%
8.36%
8.77%
11.23%
13.45%
14.71%
54.27%
54.20%
50.36%
50.00%
47.76%
2.99%
3.57%
-1.09%
0.83%
1.23%
59.61% 59.44% 60.46% 64.19% 63.68%
100.00% 100.00% 100.00% 100.00% 100.00%
ts
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
10.90%
20.20%
15.94%
1.48%
10.90%
18.98%
15.05%
1.38%
10.90%
17.44%
14.07%
1.25%
10.90%
16.04%
13.03%
1.13%
10.90%
14.58%
11.88%
1.09%
10.90%
13.10%
10.52%
0.95%
10.90%
12.01%
9.68%
0.87%
10.90%
10.96%
8.86%
0.79%
10.90%
9.99%
8.08%
0.72%
10.90%
9.08%
7.34%
0.66%
3.09% 50.87% 48.26% 44.85% 40.75% 35.82% 33.08% 30.35% 27.66% 25.11%
5.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00%
15.39%
14.05%
12.81%
11.70%
10.69%
9.69%
8.83%
8.05%
7.33%
6.68%
1.48%
1.38%
1.25%
1.13%
1.09%
0.95%
0.87%
0.79%
0.72%
0.66%
1.32%
1.05%
1.04%
0.94%
0.85%
0.78%
0.70%
0.65%
0.59%
0.53%
0.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
5.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%
6.91%
9.59%
6.68%
9.16%
6.41%
8.36%
5.89%
7.74%
5.34%
7.18%
4.70%
6.32%
4.35%
5.81%
3.99%
5.30%
3.63%
4.84%
3.30%
4.41%
1.00%
2.69%
1.00%
20.67%
0.77%
18.83%
0.83%
17.15%
0.90%
15.62%
0.68%
14.23%
0.63%
12.96%
0.57%
11.80%
0.54%
10.75%
0.50%
9.79%
7.00%
37.00%
37.00%
37.00%
37.00%
37.00%
37.00%
37.00%
37.00%
37.00%
0.03%
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
8.79%
8.68%
8.57%
8.09%
7.31%
6.27%
5.85%
5.40%
4.92%
4.45%
57.80%
56.49%
56.55%
56.66%
57.09%
57.82%
58.79%
59.20%
59.62%
60.06%
1.64%
1.60%
1.61%
1.61%
1.62%
1.64%
1.67%
1.68%
1.69%
1.71%
3.00% 63.00% 63.00% 63.00% 63.00% 63.00% 63.00% 63.00% 63.00% 63.00%
0.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
, Inc - Common Size Income Statement
es
goods sold
profit
penses
ng income
expense, net
before provision for income taxes
n for income taxes
ome
2002
100.00%
60.70%
39.30%
28.66%
10.79%
0.34%
10.28%
3.53%
6.70%
2003
100.00%
59.02%
40.98%
29.49%
11.65%
0.27%
10.50%
3.58%
4.43%
2004
100.00%
57.14%
42.86%
30.21%
12.65%
0.20%
11.83%
4.12%
7.72%
2005
100.00%
55.27%
44.33%
30.61%
13.73%
0.03%
13.48%
4.70%
8.78%
2006
100.00%
55.95%
44.05%
29.94%
14.10%
-0.25%
14.32%
5.01%
9.31%
ts
007
0%
1%
9%
8%
5%
7%
8%
7%
1%
2008
100.00%
57.61%
42.39%
29.78%
15.63%
0.04%
15.59%
5.35%
10.24%
2009
100.00%
57.61%
42.39%
29.78%
16.45%
0.01%
16.44%
5.64%
10.80%
2010
100.00%
57.61%
42.39%
29.78%
17.32%
-0.01%
17.33%
5.94%
11.38%
2011
100.00%
57.61%
42.39%
29.78%
18.23%
-0.02%
18.24%
6.26%
11.99%
2012
100.00%
57.61%
42.39%
29.78%
19.19%
0.01%
19.18%
6.58%
12.60%
2013
100.00%
57.61%
42.39%
29.78%
20.20%
0.00%
20.19%
6.93%
13.27%
2014
100.00%
57.61%
42.39%
29.78%
21.26%
0.00%
21.26%
7.29%
13.97%
2015
100.00%
57.61%
42.39%
29.78%
22.38%
0.00%
22.38%
7.68%
14.70%
2016
100.00%
57.61%
42.39%
29.78%
23.56%
0.00%
23.56%
8.08%
15.48%
os
2002
2003
2004
2005
2.66
1.44
2.27
1.30
2.32
1.36
2.72
1.45
3.18
1.83
2.8
1.2
IENCY RATIOS
ts Receivable Turnover
eceivables
ory Turnover
nvenory
g Capital Turnover
5.74
63.95
4.20
86.88
3.62
5.48
66.56
4.37
83.51
4.26
5.09
71.69
4.17
87.58
4.01
5.78
63.16
4.24
86.03
3.50
6.10
59.86
4.21
86.70
3.17
6.2
58.
4.
90.
3.1
TABILITY RATIOS
rofit Margin
fit Margin
urnover
on Assets
on Equity
0.42
0.07
1.55
0.11
0.22
39.30%
6.70%
1.54
10.30%
40.98%
4.43%
1.59
7.06%
12.35%
42.86%
7.72%
1.55
11.96%
23.70%
44.33%
8.78%
1.57
13.78%
25.34%
44.05
9.31
1.5
14.10
24.66
0.63
92.24
102.79
67.74%
30.92
19.56
68.23%
39.99
4.46
65.39%
59.00
230.08
55.79%
388.46
253.34
57.02
-57.2
6.5
9.94
37.28
0.02
11.90
30.66
3.61%
11.02
33.11
0.98%
8.97
40.68
1.71%
9.03
40.40
1.54%
8.7
41.
1.33
DITY RATIOS
Ratio
Asset Ratio
AL STRUCTURE ANALYSIS
Equity Ratio
nterest Earned
ervice Margin
R RATIOS
ts Payable Turnover
ayables
ll to Total Assets
Average
200
sts
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2.34
1.37
2.46
1.45
2.56
1.51
2.62
1.57
2.61
1.63
2.52
1.69
2.55
1.77
2.57
1.85
2.57
1.94
2.57
2.04
7.68
47.50
5.61
65.03
5.11
8.18
44.61
5.94
61.42
5.14
8.90
41.01
6.35
57.44
5.27
9.68
37.70
6.87
53.16
5.60
10.65
34.28
7.53
48.48
6.18
11.85
30.79
8.50
42.94
7.19
12.93
28.23
9.24
39.51
7.71
14.17
25.76
10.09
36.17
8.37
15.55
23.48
11.07
32.97
9.18
17.09
21.36
12.18
29.97
10.13
42.39%
9.71%
1.55
15.07%
25.36%
42.39%
10.24%
1.55
15.90%
27.71%
42.39%
10.80%
1.55
16.77%
29.22%
42.39%
11.38%
1.55
17.67%
30.80%
42.39%
11.99%
1.55
18.61%
32.43%
42.39%
12.60%
1.55
19.56%
34.09%
42.39%
13.27%
1.55
20.60%
35.89%
42.39%
13.97%
1.55
21.68%
37.79%
42.39%
14.70%
1.55
22.83%
39.78%
42.39%
15.48%
1.55
24.03%
41.87%
58.73%
218.42
20.33
58.73%
427.36
17.74
58.73%
1514.03
24.42
58.73%
-1555.14
23.37
58.73%
-1125.57
22.56
58.73%
1845.01
31.39
58.73%
58.73%
58.73%
58.73%
5602.65 -90224.64 -14936.84 -64349.54
34.89
40.01
44.47
50.73
12.94
28.20
1.32%
13.38
27.27
1.05%
13.96
26.14
1.04%
15.19
24.02
0.94%
16.76
21.77
0.85%
19.02
19.19
0.78%
20.55
17.76
0.70%
22.40
16.29
0.65%
24.62
14.82
0.59%
27.12
13.46
0.53%
RESIDUAL INCOME VALUATION
n RI
ng BE (per share)
gs Per Share
nds per share
BE (per share)
2005
57.5
0.0743
l" Income
al Income (RI)
nt Factor
t Value of RI
ity (per share) 2014
V of RI (end 2014)
uation (Terminal) Value
erminal Value (end 2014)
ted Value (2014)
Price per share
h
59.95
23.02
4.12
$87.08
$57.50
0.47
0.58
0.66
0.76
0.86
0.96
1.12
1.28
1
2
3
4
5
6
7
8
9
2006
57.5
$5.44
$1.14
61.80
2007
61.80
$6.23
$0.76
67.27
2008
67.27
$7.21
$0.81
73.67
2009
73.67
$8.35
$0.87
81.15
2010
81.15
$9.66
$0.90
89.91
2011
89.91
$11.17
$0.90
100.19
2012
100.19
$12.89
$0.85
112.23
2013
112.23
$14.90
$0.86
126.27
2014
126.27
$17.23
$0.87
142.62
4.27
1.17
0.931
1.08
4.59
1.63
0.866
1.42
5.00
2.21
0.807
1.79
5.47
2.88
0.751
2.16
6.03
3.63
0.699
2.54
6.68
4.49
0.650
2.92
7.44
5.45
0.606
3.30
8.34
6.56
0.564
3.70
9.38
7.84
0.525
4.12
Sensitivity Analysis
ValuePercent
68.84%
26.43%
4.73%
100.00%
g
0.11
0.13
0.15
0.17
0.19
0
$136.40
$133.90
$130.60
$127.83
$124.93
0.05
$138.70
$136.20
$132.90
$130.13
$127.23
0.1
$141.00
$138.50
$135.20
$132.43
$129.53
0.15
$143.30
$140.80
$137.50
$134.73
$131.83
ABNORMAL EARNINGS GROWTH
1
2
3
4
2006
2007
2008
2009
2010
2011
2012
2013
2014
$5.44
$1.14
$6.23
$0.76
$0.09
$6.32
$5.87
$0.45
$7.21
$0.81
$0.06
$7.27
$6.72
$0.55
$8.35
$0.87
$0.06
$8.41
$7.78
$0.63
$9.66
$0.90
$0.07
$9.73
$9.01
$0.72
$11.17
$0.90
$0.07
$11.24
$10.42
$0.82
$12.89
$0.85
$0.07
$12.96
$12.05
$0.91
$14.90
$0.86
$0.07
$14.97
$13.91
$1.06
$17.23
$0.87
$0.07
$17.29
$16.08
$1.22
or
0.927
0.859
0.796
0.738
0.684
0.634
0.588
0.545
EG
$0.42
$0.48
$0.50
$0.53
$0.56
$0.58
$0.62
$0.66
2005
ested at 17% (Drip)
vidend Earnings
Earnings
mal Earning Growth (AEG)
$5.44
$4.35
PS
V of AEG
ing (Terminal) Value
erminal Value
V of AEG
verage EPS Perp (t+1)
zation Rate (perpetuity)
er Share 2014
$10.08
$5.49
$9.84
$15.28
0.0789
$96.90
0.0789
0
Price per share
$80.31
$16.59
5
6
7
8
$
Operations
Used) by Investing Activities
(to firm)
43% WACC)
Free Cash Flows
lue of Annual Cash Flows
minal) Value (assume no growth)
Continuing (Terminal) Value
m (end of 2014)
ebt and Preferred Stock
end of 2014)
per Share
ACC
DISCOUNTED FREE CASH FLOW VALUATION
2005
(Amounts in millions of dollars except per share data)
2006
2007
2008
2009
2010
2,152
2,056
2,392
2,716
3,119
(621)
(685)
(779)
(744)
(821)
1,530
1,372
1,613
1,972
2,297
0.931
0.866
0.807
0.751
0.699
1424.6
1188.4
1301.2
1480.4
1605.5
2011
3,605
(730)
2,875
0.650
1869.9
2012
4,069
(752)
3,317
0.606
2008.7
2013
4,673
(765)
3,908
0.564
2202.5
1,635
61897.25
8,722
10,357
$1,337
9,020
152.24
d
debt %
equity %
12.90%
87.10%
wacc
debt wacc wacc-dwac
0.0743
0.03370
0.04060
0.04662
0
LONG RUN RETURN ON EQUITY/RESIDUAL INCOME
RI
0.01
2005
g BE (per share)
s Per Share
ds per share
BE (per share)
79.53
7.89%
inBVE
rice per share
ROE
Growth in BVE
ed Value
0.01
3
0.01
4
91.01
0.01
7
2008
2009
2010
2011
2012
89.30
95.70 103.18 111.94 122.22
$7.21
$8.35
$9.66 $11.17 $12.89
$0.81
$0.87
$0.90
$0.90
$0.85
95.70 103.18 111.94 122.22 134.26
2013
2014
134.26 148.30
$14.90 $17.23
$0.86
$0.87
148.30 164.65
6.84%
5.41%
7.43%
6.52%
8.08%
7.17%
11.10%
10.46%
9.98% 10.55%
9.18%
9.85%
8
0.01
2007
83.83
$6.23
$0.76
89.30
9.36%
8.49%
6
0.01
2006
79.53
$5.44
$1.14
83.83
8.72%
7.82%
5
0.01
2
Sensitivity Analysis
$80.31
9.30%
8.44%
0.01
1
79.53
0.09
0.1
0.11
0.12
0.13
0
92.12
$93.15
$94.19
$95.26
$96.36
g
0.05
$93.82
$94.85
$95.89
$96.96
$98.06
0.1
0.15
$95.52
$97.22
$96.55
$98.25
$97.59
$99.29
$98.66 $100.36
$99.76 $101.46
9
11.62%
11.03%