NIKE, Inc. (NKE)
Investment report by Jason Lancellotti and Paolo Ruiz
COMPANY OVERVIEW
Nike, Inc. was incorporated in 1968 when The University of Oregon’s track and field coach, Bill
Bowerman, and his star runner, Phil Knight, thought they could better design and sell shoes to
runners than what was available at the time. It is headquartered in Washington County, Oregon.
Nike is many things – a product designer, a consumer goods manufacturer, a brand
communicator, a leader in corporate responsibility, and a portfolio of authentic footwear,
apparel, and equipment brands. In each business Nike focuses on one thing – innovation.
Nike’s principal business activity is the design, development, and worldwide marketing of high
quality footwear, apparel, equipment, and accessory products. Nike is the largest seller of athletic
footwear and athletic apparel in the world. The Company sells its products to retail accounts,
including stores and internet sales, and through a mix of independent contractors. Virtually all
footwear and apparel products are manufactured outside the United States, while equipment
products are produced both in the United States and abroad.
INVESTMENT THESIS
Nike has positioned itself to realize considerable growth in the future. As the world’s largest
footwear and apparels manufacturing company by revenues, it achieves significant economies of
scale and scope among its manufacturing, distributing, and sales processes that leads to healthy
margins. Furthermore, the Company has moved aggressively into several emerging markets
worldwide, making sure that the brand is widely recognizable as competitors begin to saturate
these markets. The Company’s well-diversified mix of products provides protection from
adverse changes in any one product or geographic market, allowing Nike to properly and
confidently adjust to ever-changing consumer demands. Furthermore, when considering the
growth opportunities for the Company embedded in the price, we found the market price to be
fairly priced at $62.95, leading us to believe it is a hold.
We conducted a discounted cash flow for the Company, which we believe to be the most
accurate valuation method in Nike’s stock price. Relative valuation is not ideal because it uses
volatile data collected in 2009 or over the trailing twelve months ended April 2010. Furthermore,
no comparable company amply represents Nike on revenues and market capitalization scales.
The relative valuation is, however, helpful as a check to see if our fair value estimate is feasible.
Our best estimate of Nike’s share price using a discounted cash flow valuation is $70.71,
signaling that the market is undervaluing the stock. This analysis parallels the results found using
the less reliable relative valuation, which gives us more confidence in the strength of our
decision.
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As owners, we do not want profits merely through capital gains. Nike management focuses on
significant payouts to shareholders, totaling an average of 79% of earnings since 2005, in the
form of dividends and repurchases, which makes its stock quite desirable. Nike pays quarterly
dividends and gradually increases its dividend payouts. In 2009 Nike increased dividends 11
percent from 2008 to 2009, from $0.88/share to $0.98/share, and its dividend yield increased one
tenth of a percent over the same time period from 1.4 percent to 1.5 percent.
Payout Summary
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
Retention ratio
Total payout ratio
Cash dividends / share ($)
Dividend payout ratio
Repurchase ratio
Amount paid to shareholders ($ MM)
34%
66%
0.48
21%
45%
798
23%
77%
0.59
22%
55%
1,075
12%
88%
0.71
24%
64%
1,320
10%
90%
0.88
23%
67%
1,695
25%
75%
0.98
32%
43%
1,109
21%
79%
0.75
24%
56%
1,220
21%
79%
0.83
21%
79%
0.88
21%
79%
1.05
21%
79%
1.07
1,354
1,422
1,700
1,734
Total gain / share ($)
1.52
2.08
2.62
3.42
2.29
2.52
2.79
2.93
3.51
3.58
Based on a discounted cash flow and relative valuation analyses we suggest that Nike was fairly
priced by the market at $62.95/share and find it a and strategic investment to gain exposure to the
consumer discretionary sector as part of a diversified portfolio. On February 11, 2010 we
purchased Nike shares at $62.95. As of April 9, 2010, due in large part to third quarter earnings
growth, Nike’s stock rose to $75.18. This is a holding period return of 19 percent, annualized to
117 percent. Considering our discounted cash flow analysis and relative valuations we believe
the April 9 price is fairly valued to slightly overvalued. We would consider Nike stock to be a
buy at $55 and sell at $90.
BUSINESS DESCRIPTIONS
Products
Nike’s athletic footwear products, the leading revenue segment, are designed primarily for, but
not restricted to, specific athletic use. The main emphasis that the Company places on its
products are quality and innovation in products designed for men, women, and children. Nike’s
top-selling footwear categories are running, training, basketball, and soccer. Other footwear
categories include aquatic activities, baseball, cheerleading, football, golf, lacrosse, outdoor
activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and
recreational uses.
Nike sells sports apparel and accessories relevant to each sport mentioned above as well as
sports-inspired lifestyle apparel, including bags, socks, sport balls, eyewear, protective
equipment, basic sport equipment, etc. Apparel and accessories for most sports are designed to
compliment Nike’s footwear products, feature the same trademarks, and are sold through the
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same marketing and distribution channels. It is often the case that Nike designs unique footwear
styles for each sport, and apparel and accessories for each sport follow suit on that style. Nike
also markets apparel with licensed college and professional team and league logos.
In addition to selling products directly to consumers, Nike enters into license agreements that
permit unaffiliated parties to manufacture and sell various apparel, equipment, and accessory
items, such as swimwear, children’s apparel, training equipment, eyewear, electronic devices,
and golf accessories.
In addition to Nike’s footwear, apparel, and accessories businesses, the Company sells products
under other brand names in particular markets. Nike wholly-owns five footwear and apparel
companies that specialize in different sports: Cole Haan, Converse Inc., Hurley International
LLC, Umbro Ltd., and Nike Golf. Combined, these subsidiaries accounted for 13 percent of total
revenues, $2.5 billion, in fiscal 2009.
Cole Haan, headquartered in Yarmouth, Maine, designs and distributes
dress and casual footwear, apparel and accessories for men and women
under the brand names Cole Haan® and Bragano®.
Converse, headquartered in North Andover, Massachusetts, designs,
distributes, and licenses athletic and casual footwear, apparel and accessories
under the Converse®, Chuck Taylor®, All Star®, One Star®, and Jack
Purcell® trademarks.
Hurley, headquartered in Costa Mesa, California, designs and distributes a
line of action sports apparel for surfing, skateboarding, and snowboarding,
youth lifestyle apparel, and accessories under the Hurley® trademark.
Umbro, headquartered in Manchester, England, designs, distributes and
licenses athletic and casual footwear, apparel and equipment, primarily for
the sport of soccer, under the Umbro® trademark.
Nike Golf, headquartered in Beaverton, Oregon, designs and markets golf
equipment, apparel, balls, footwear, bags and accessories worldwide.
Manufacturing Footwear
Virtually all of Nike’s footwear is manufactured outside the United States. Factories in China,
Vietnam, Indonesia, and Thailand produced 98 percent of total Nike brand footwear in 2009.
Nike’s largest footwear factory accounted for five percent of 2009 footwear production.
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The main materials used in Nike footwear are rubber, plastic compounds, foam cushioning
materials, nylon, leather, canvas, and polyurethane films used for cushioning components. Nike’s
wholly-owned subsidiary, NIKE IHM (In House Manufacturing), which produces synthetic
rubbers and polyurethane films, was the largest supplier of foam and cushioning components.
Manufacturing Apparel
Nike brand apparel is also manufactured almost entirely outside of the United States. Nike
apparel is manufactured by independent contract manufacturers located in 34 countries. Nike’s
largest apparel factory accounted for five percent of 2009 apparel production. The main materials
used in Nike apparel are natural and synthetic fabrics and threads, plastic and metal hardware,
and water and heat resistant fabrics.
Sales and Marketing
Nike is exposed to several demand factors in various geographic and product markets. The mix
of product sales may vary considerably as a result of changes in seasonal and geographic demand
for particular types of footwear, apparel and equipment. Because Nike is a consumer products
company, the relative popularity of various sports and related products, as well as shifting design
trends, affects the overall level of demand.
To help market its products, Nike aggressively contracts with highly successful and influential
athletes, coaches, teams, and leagues. In an effort to stay competitive and retain dominant market
shares, Nike actively responds to trends and shifts in consumer preferences by adjusting the mix
of existing product offerings, developing new products, styles and categories, and influencing
sports and fitness preferences through aggressive marketing. A key imperative for Nike is to
immediately adjust for continuous changes in consumer demands.
Nike makes substantial use of its futures ordering program, which allows retailers to order five to
six months in advance of delivery with the commitment that their orders will be delivered within
a set time period at a fixed price. In 2009, 89% of Nike’s United States wholesale footwear
shipments were made under the futures program.
GEOGRAPHIC ANALYSIS
Nike’s 2010 fiscal year ends May 31, 2010. The first two quarters of 2010 were not favorable to
Nike’s top and bottom line performance. Second quarter 2010 year to date revenues dropped
eight percent and net income dropped one percent. Including currency changes, during the first
two quarters of 2010 Nike realized revenue losses in all regions. Third quarter revenues of 2010
outperformed the same quarter of 2009 by seven percent, however this did not fully alleviate
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losses in the prior two quarters, as third quarter 2010 year to date revenues were down four
percent. Third quarter net income increased 21 percent year to date, but is attributable almost
entirely to reductions in goodwill and intangible asset impairments. In 2009, cumulative brand
sales in the United States accounted for approximately 42 percent of total revenues, down from
43 percent in 2008 and 47 percent in 2007. Nike utilizes 20 sales offices in the United States, and
sells to more than 23,000 retail accounts in the Unites States. International sales accounted for 58
percent of total revenues in 2009, compared to 57 percent in 2008 and 53 percent in 2007. Nike
branch offices are located in over 50 countries. The Company operates 14 international
distribution centers and sells to more than 28,000 retail accounts outside the United States. The
five wholly-owned subsidiaries comprised 13 percent of total revenue in 2009; eight percent of
which was realized in the United States Region.
2009
2009 Revenues by Region ($MM)
% of
Total
09 - 08 YoY
2008
% of
Total
08 - 07 YoY
2007
% of
Total
US Region
6,543
34%
2%
6,415
34%
5%
6,132
38%
EMEA (Europe, Middle East, Asia)
5,512
29%
-2%
5,629
30%
18%
4,764
29%
Asia Pacific Region
3,322
17%
15%
2,888
16%
26%
2,296
14%
Americas Region
1,285
7%
10%
1,165
6%
20%
967
6%
Other Businesses
2,514
13%
-1%
2,531
14%
17%
2,168
13%
19,176
100%
3%
18,627
100%
14%
16,326
100%
Total
Nike recognizes significant growth opportunities in emerging markets, particularly in the Asia
Pacific and Americas regions. From 2003 to 2009, total revenue growth for both regions was 144
percent. Other Businesses worldwide has also grown tremendously over the past six years, at 18
percent annually on average, reflecting the Company’s success in its diversification strategy.
Trending Revenues by Region ($MM)
7000
US Region
6000
5000
EMEA (Europe, Middle
East, Asia)
4000
Asia Pacific Region
3000
2000
Americas Region
1000
Other Businesses
0
2002
2004
2006
2008
2010
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From 2003 to 2009, the Europe, Middle East, and Asia region average annual growth rate was
ten percent. However, revenues were hit particularly hard in the first three quarters of 2010.
Revenues for the region were down four percent in quarter three compared to the same quarter in
2009. Because EMEA is Nike’s second largest regional market, the Company must make
enhanced marketing, product line, and sales initiatives to focus on changing consumer trends and
demands in these markets to ensure that this main region remains profitable in the future.
In the Asia Pacific region, changes in currency exchange rates accounted for three percent of
revenue growth in 2009. Aside from currency impacts in the Asia Pacific region, all countries in
this region delivered revenue growth, with China being the region leader, at 22 percent revenue
growth on a currency neutral basis in 2009 from 2008. In the third quarter of 2010, only China
realized a revenue increase from the same quarter a year prior. The third quarter 2010 year to
date revenue is down four percent in China, indicating that it is still a worrisome market for
Nike.
In the Americas region, currency negatively impacted revenue growth by nine percent in 2009.
Aside from currency impacts, the Americas region reported growth in all markets, led by Brazil,
Argentina, and Mexico. The 2008 to 2009 year over year revenue increase in this region in
dollars is ten percent, indicating that revenues for Nike would have been much larger had certain
currencies not devalued so dramatically during the global economic crisis. In the third quarter of
2010, revenues in this region exploded 43 percent over the same period in 2009. On a year to
date scale, revenues in this region grew 12 percent – the only region to post a year to date
revenue gain. This represents massive growth opportunities in the Americas region because as
these currencies appreciate Nike will realize even higher dollar growth.
The Other Businesses segment experienced a one percent loss, $16.7 million, in revenue in 2009
from 2008, but was primarily attributable to the loss of revenue from recently sold subsidiaries –
Bauer Hockey and Starter. Excluding these discontinued companies, Other Businesses would
have increased five percent in 2009, led by strong performance from Converse and Hurley. In the
third quarter of 2010, this business segment’s revenue increased 13 percent over the same quarter
in 2009. On a year to date scale based on third quarter records this business segment realized
revenue growth of three percent. Inherent in this segment is the Company’s diversification
strategy, which proved to be beneficial as it acted as a buffer during periods of declining revenue
by growing around zero to one percent.
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PRODUCT ANALYSIS
Footwear is the leading revenue business across all regions. Unit sales of footwear increased in
all regions in 2009 from 2008. Footwear is also the most insensitive to macroeconomic
conditions as revenue increased six percent in 2009 from 2008, the only business line to realize
significant revenue growth. Apparel, Nike’s second leading revenue business, remained stagnant
around 27 percent of Nike’s total revenues in 2009 compared to 2008. Other Business declined
less than one percent in 2009 from 2008, but this is evident of lost sales from Bauer Hockey and
Starter. Factoring out these sold businesses, the Other Businesses segment realized low single
digit growth in 2009 from 2008.
2009
% of
Total
09 - 08 YoY
2008
% of
Total
08 - 07 YoY
2007
% of
Total
Footwear
10,307
54%
5.9%
9,732
52%
14%
8,514
52%
Apparel
5,245
27%
0.2%
5,234
28%
14%
4,577
28%
Equipment
1,110
6%
-1.8%
1,130
6%
6%
1,068
7%
Other Businesses
2,514
13%
-0.7%
2,531
14%
17%
2,168
13%
19,176
100%
2.9%
18,627
100%
14%
16,326
100%
Global Revenues by Product ($MM)
Total
Clearly footwear is the most important business for Nike. Since apparel and equipment are
stylized to reflect footwear in a particular sport, apparel and equipment sales can be tied to
footwear success. Thus, Nike’s focus is on increasing footwear revenue above all else, and these
other products will realize growth as footwear revenue grows.
Trending Revenues by Product ($MM)
12000
10000
8000
Footwear
6000
Apparel
4000
Equipment
Other Businesses
2000
0
2002
2004
2006
2008
2010
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GROWTH INITIATIVES
As investors, we believe it is imperative to know where the growth opportunities exist within the
Company, and thus, how future cash flows will be achieved.
We believe there are eight aspects of the Company that define long-term growth potential:
1. Passion for sports
Nike sees the world as endless possibilities for human potential. It continues to inspire
new generations of athletes and consumers and continuously adjusts product lines to
reflect consumer demands. Nike believes that sport is a universal language and teaches
humans about effort, teamwork, respect, adversity, and fair competition. Nike’s passion is
inherent in all its growth factors.
2. Global presence
Since its founding in 1968, Nike has grown into the world’s largest athletic footwear and
apparel company. It sells products in 170 countries, employs over 30,000 people
worldwide, competes in over 30 major sports with 12 brands, and works with over 600
factories. Since 2005, over 50 percent of Nike’s revenue came from outside the United
States. Nike established leadership positions in emerging markets like China and Brazil,
which has potential for tremendous growth.
3. Nike has a strong portfolio of brands
The “Swoosh” is one of the most recognized logos in the world. Today, this logo can be
found in sporting venues worldwide. In addition to the Nike brand, the Company whollyowns five subsidiaries that enhance its ability to reach segmented product and geographic
markets worldwide. Each brand represents a different lifestyle, directed toward a defined
consumer, which diversifies opportunities for long-term growth. This product
diversification strategy also enables Nike to leverage its resources and core competencies
in product, marketing, and operations to drive consistent growth and profitability.
4. Leadership through innovation
Nike believes innovation is consistent with improvement, and not just the “new thing”.
The Company understands that consumers are the ultimate determinants in successes or
failures of innovation strategies, so it understands that research and development are key
aspects of its businesses. The Nike Sport Research Lab is a premier center for R&D in
biometrics, physiology, engineering, and other related fields. Nike employs committees
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made up of athletes, coaches, and other sport figures to examine product designs and
concepts intended for improvement before sales are implemented.
5. Connection with consumers
As increasing competition lowers margins for Nike, it must maintain its competitive
advantage in consumer relations. To better identify growth opportunities among
consumers, Nike focuses on seven categories: action sports, basketball, soccer, men’s and
women’s training, running, and sportswear. By singling out each category, Nike can
spotlight individual sport concerns regarding footwear and apparel to connect more
intimately with athletes and further enhance the brand image.
6. Marketplace management
Nike understands that consumers are becoming more knowledgeable and have more
choices when it comes to sportswear than they did in the past. To capitalize on this
reality, Nike works with retailers to create a differentiated store experience that are better
tailored to specific consumers. The Company does this by evaluating product and brand
performance online and in-store to identify weaknesses in its marketing and sales
campaigns.
7. Nike operates with excellence
It is the people of Nike and their dedication to sportswear innovation that separates Nike
from competitors. If products, brands, and marketplace management create revenue
growth, operational excellence is the key to sustaining this growth and turning revenues
into shareholder value. The Company achieves this by eliminating weak products,
eliminating unnecessary costs, getting involved in every step of the supply chain, and
more strategically marketing its products.
8. Commitment to growth
From 2005 to 2009 Nike averaged nine percent revenue growth, 12 percent growth in
EPS, and increasing its stock price 60 percent while the S&P 500 declined. Nike achieves
these remarkable figures by staying focused on its strengths to increase market shares.
Also, Nike is on the forefront of many emerging markets which are expected to grow
significantly in the next ten to twenty years. By staying focused on its strengths, and not
deviating into new or relatively unusual businesses, Nike believes it will be a larger, more
profitable company in the future.
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ACQUISITIONS
Nike acquired Umbro on March 3, 2008 in cash for a purchase price of $576.4 million. This
acquisition was intended to increase market share in the United Kingdom and expand Nike’s
global leadership in soccer. The acquisition of Umbro also has potential to increase soccer
market shares in emerging markets such as China, Russia, and Brazil. Nike plans to aggressively
showcase the Umbro brand during the FIFA 2010 World Cup in South Africa.
RISK FACTORS
Nike operates in a highly competitive and rapidly changing environment. It is not possible to
predict all risk factors inherent in Nike’s diversified businesses at any point in time as they are
constantly changing. We will focus on the main risks associated with Nike.
Nike’s products face intense competition.
As a consumer products company specializing in athletic footwear, apparel, and equipment, the
relative popularity of various sports and changing design trends affect the demand for Nike’s
products. Nike competes with countless athletic and leisure shoe companies on a worldwide
basis. Competitors’ product offerings, technologies, marketing expenditures, pricing, costs of
production, and customer services are all areas where Nike faces extreme competition.
Furthermore, Nike competes with other companies for the production capacity of independent
manufacturers that produce its products.
Nike’s success depends on its ability to identify and define product trends as well as to anticipate
and react to changing consumer demands as quickly as possible to retain market share.
Failure to continue to obtain high quality endorsers.
Nike is known for its aggressive marketing and apparently dominant presence in several sports.
The Company builds relationships with professional athletes, coaches, teams, and leagues to
establish product authenticity with consumers. If certain endorsers stop promoting Nike, the
Company can expect negative impacts on sales. Also, actions taken by sponsored athletes, on
and off the field, that damage the reputation of those athletes could hurt Nike’s brand image.
Nike’s international operations involve inherent risks which could harm the company.
Nike is currently expanding aggressively into emerging markets worldwide. It realizes the
importance to quickly expand into emerging economies before competition saturates markets.
Most of Nike’s athletic footwear and apparel is manufactured outside the United States, and most
products are sold within the United States. As such, Nike is exposed to general international
risks, including foreign laws and regulations, varying consumer preferences across geographic
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regions, political unrest, disruptions in cross-border shipments, and changes in economic
conditions in certain countries. These factors, among others, could affect Nike’s ability to
produce, import, and sell products worldwide.
Currency exchange rate fluctuations could result in higher costs and decreased margins.
Now, more than ever, Nike is expanding its global operations. Thus, Nike’s sales are paid in
several currencies, which increase its exposure to foreign currency exchange rates. Currency
exchange rate fluctuations could also impede the business of the independent manufacturers that
manufacture Nike products by making their purchases of raw materials more expensive.
Nike’s products are subject to risks associated with overseas sourcing, manufacturing, and
financing.
There are no guarantees on the supply of fabrics or raw materials from current sources in the
future. In the event of supplier problems, Nike might not be able to locate alternative suppliers
with comparable quality standards. In this case, Nike would expect to pay a premium to “last
minute suppliers” which could negatively affect financial performance.
Since independent manufacturers produce most of Nike’s products outside its principal sales
markets, Nikes products must be transported by third parties over large geographic distances.
Delays at any point in the supply chain could have negative impacts on financial performance.
Due to the Company’s worldwide distribution channels, Nike is exposed to rising fuel costs,
which would negatively affect its profit margins.
FOREIGN CURRENCY EXPOSURES AND HEDGING PRACTICES
As a global leader in consumer products, Nike is exposed to exchange rate risk of several
currencies. Its primary foreign currency exposures are related to United States dollar transactions
at wholly-owned foreign subsidiaries, as well as transactions and translation of results
denominated in the Euro, British pound, Chinese Yuan, and Japanese Yen. Nike’s foreign
exchange risk management program seeks to minimize volatility of currency fluctuations in
dollar terms. Nike manages these exposures by taking advantage of natural offsets and currency
correlations that exist within its currency portfolio. Nike also regularly uses derivative
instruments such as forward contracts and options to hedge foreign exchange risk.
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STRENGTHS, WEAKNESSES, OPPORTUNITIES, THREATS
Strengths:
Brand Equity

Nike is able to command higher margins because of strong brand equity. Nike’s
aggressive marketing campaigns show that the best athletes in the world use Nike
products. Along with the highest quality of products, Nike has a unique image and style
that differentiates itself from competitors. Nike’s brand equity certainly wins the hearts of
many consumers, allowing for considerable amounts of recurring revenues.
Global presence

Nike has diversified its geographic operations and sells in more than 170 countries. By
doing so, Nike achieves economies of scale in manufacturing and distribution, as well as
mitigating risk among individual economies.
Diverse line of products

Along with the Nike brand, the Company wholly-owns five subsidiaries each specializing
in unique product markets, which mitigates risk among brands.
Weaknesses:
Currency exposure

As a global company, Nike runs the risk of adverse fluctuations of exchange rates. The
Company uses a hedging strategy designed to eliminate foreign exchange risks, but also
limits upside potential.
Decreasing United States market share

The United States is the largest and most saturated market that Nike operates in. The
Company has been directing efforts on expanding into emerging markets, and as a result
is losing US market share. Since the US is the largest market, a loss in market share may
result in substantial revenue losses to Nike.
Opportunities:
Expansion into emerging markets

Nike understands that emerging markets provide enormous growth opportunities,
provided that the Company has a presence in these markets before this growth occurs.
Nike is adamant in entering emerging markets before they have “emerged” so it can take
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full advantage of market growth. Nike has realized double digit revenue growth in China
and other Asian Pacific companies, as well as high revenue growth in the Americas
regions in fiscal 2008 and 2009. These markets are not yet at the point of maturity, so
high growth is expected in the near to mid-term future.
Innovation

The key intangible asset to Nike is innovation. It constantly changes product mixes,
marketing campaigns, and geographic presences based on profitability. Because Nike
strives to be a market innovator in several constantly changing environments, infinite
opportunities exist where Nike can gain market share.
Threats:
Revenue relies on consumers’ discretionary income

As a consumer products company Nike is exposed to consumers’ discretionary income
which is correlated to market cyclicality and interest rates. Decreased consumer
disposable income and sentiment has adversely affected Nike’s performance during the
global economic crisis. Negative macroeconomic events pose a significant threat to Nike.
COMPETITIVE ADVANTAGES
As the largest company in the Footwear and Apparels Manufacturing industry, Nike
differentiates itself from competitors in several ways. Its rampant global presence ensures that
Nike is a household name in nearly every country. The Company’s aggressive marketing
campaigns push the Nike brand in every major sport worldwide along with several less popular
sports. In every country that Nike operates, it strives to sponsor the best athletes in various
sports, which builds brand equity and boosts confidence of future growth prospects.
Nike makes substantial use of its “futures” ordering program which allows retailers to order Nike
products up to six months in advance at a stated price. This sales program minimizes Nike’s
inventory costs and purchasing costs, freeing up cash that can be used in other areas. This
program also allows Nike’s contractors to employ “lean” manufacturing because they know in
advance what needs to be produced and when. This results in cost efficiencies in production by
eliminating wasted resources.
Nike employs a well diversified mix of production contractors who manufacture Nike products,
allowing specialized contractors to manufacture products that require specific procedures and
output quality. This allows Nike to sell high quality, specialized products in several sports that
many of its competitors are unable to replicate.
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NIKE VALUATION
Relative Valuation
Nike is by far the largest by market capitalization and sales at over fifteen times greater than the
industry average. Our first challenge for a relative valuation of Nike was choosing comparable
companies with similar revenues, market capitalization, and business lines. Nike’s most similar
comparable companies are arguably Adidas, Reebok, and Puma. Unfortunately none of these
companies are publically owned in the United States, and as of January 2006 Reebok is now a
subsidiary of Adidas. Our second challenge was retrieving data for Adidas, Reebok, and Puma.
We were unable to find company multiples for these companies, so we looked for other
companies that we believed, as a whole, represented Nike’s businesses. Admittedly, no company
that publically discloses financial information is particularly similar to Nike especially in this
current economic climate. We did, however, select shoe and apparel products corporations with
significant international exposure that we expect to behave like Nike in terms of margins in the
near future.
Company
PE (ttm)
PE Price
EV/EBITDA (ttm)
EV/EBITDA Price
11.44
ROE (2009)
Nike
20.30
Skechers
33.39
106.18
16.27
98.61
18.00%
7.73%
VF Corporation
15.41
49.00
9.26
57.66
16.63%
Wolverine
24.46
77.78
9.61
59.67
13.58%
Polo Ralph Lauren
18.56
59.02
9.23
57.48
15.89%
Columbia
28.69
91.23
11.30
69.55
6.91%
Under Armour
34.94
111.11
12.55
76.86
12.80%
Average
25.91
82.39
11.37
69.97
12.26%
Discounted Cash Flow analysis
We conducted a free cash flow to firm analysis to gauge a fair value for Nike. Because Nike is
increasing its percent of total revenues in foreign markets, we chose to grow revenues in each
region separately to better reflect realistic assumptions. Asia Pacific and the Americas regions, as
well as other brands, have experienced above average revenue growth compared to Nike’s total
revenues, so we felt that this should be a continuing trend in the near future.
Cost of Capital
Our base model uses a weighted average cost of capital of 8.9 percent. The Company’s average
leverage ratio since 2005 is about seven percent, leaving 93 percent of its capital obtained
through equity financing. We used a current risk-free rate of four percent reflecting current ten
year Treasury bond rates. To calculate Nike’s beta of .88, we conducted a regression of the
Company’s daily returns over the past six years and compared it to the returns on the S&P 500
over the same time period. We also chose to use a historical risk premium of six percent and a
14
five year historical average tax rate of 32 percent. Our WACC sensitivity analysis adjusts risk
premiums due to market uncertainties, as well as a minor change in the beta coefficient from
taking more volatile returns in the trailing twelve months. The capital structure remains the same
for Nike under different scenarios because Nike historically has low levels of debt, and does not
change its borrowing patterns under different market interest rates.
Scenario
Optimistic
Base
Pessimistic
Cost of Equity
Cost of Debt
WACC
8.4%
4.1%
8.1%
9.3%
4.1%
8.9%
10.4%
4.1%
9.9%
Income Statement
Our main concern in the income statement was selecting appropriate revenue growth rates for
various regions. We took into account historical evidence as well as what we believed to be
accurate measures of future outlooks. The trend over the past five years for Nike is an increase in
percent of total revenues coming from emerging markets, and a slight decrease in the more
saturated markets. We grew revenues in Asia Pacific, Americas, and Other Businesses at higher
rates than Europe and United States based on the prospective economic expansion in emerging
markets. Costs of goods sold and sales, general, and administrative expenses remains the same
percentage of sales across all regions based on Nike’s well managed distribution centers and
inventory practices. The projected costs of goods sold as a percentage of sales is slightly lower
than the historical average due to sustainable cost cutting efforts in 2010. Depreciation and
amortization is projected at eight percent as a percentage of PPE, which grew at a percentage of
sales. Nike has generous return policies to shareholders. Since 2005, the average retention ratio
is 21 percent, meaning 79 percent of net earnings is paid to shareholders via dividends and
repurchases. Management indicates that this is a primary concern to keep owners satisfied, so we
used this rate going forward.
Consolidated
Income Statement
($MM)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Revenue
12,253.1
13,739.7
14,954.9
16,325.9
18,627.0
19,176.1
18,792.6
20,108.1
21,515.6
22,806.6
23,718.8
CGS
7,001.4
7,624.3
8,367.9
9,165.4
10,239.6
10,571.7
10,148.0
10,858.4
11,618.4
12,315.5
12,808.2
SGA
3,388.5
3,955.2
4,186.0
4,749.1
5,640.9
5,802.7
5,074.0
5,429.2
5,809.2
6,157.8
6,404.1
Dep & Amort.
313.5
266.5
291.8
279.6
312.8
346.9
365.1
390.6
418.0
443.1
460.8
EBIT
1,549.7
1,893.7
2,109.2
2,131.8
2,433.7
2,454.8
3,205.5
3,429.9
3,670.0
3,890.2
4,045.8
Net Interest Exp.
(25.0)
(4.8)
36.8
67.2
77.1
9.5
17.8
15.8
13.5
11.5
10.0
Income Tax Exp.
504.4
648.2
749.6
708.4
619.5
469.8
900.0
1,113.8
1,190.6
1,261.2
1,311.0
NI
945.6
1,211.6
1,392.0
1,491.5
1,883.4
1,486.7
1,884.2
2,331.9
2,492.9
2,640.5
2,744.8
15
Balance Sheet
Most balance sheet items were projected at a historical average percentage of sales from 2005 to
2009. Prepaid expenses and accrued expenses grow as a percentage of costs of goods sold as it
closely mimics a steady percentage of costs. We chose to grow deferred tax assets as a
percentage of earnings before interest and taxes since tax expenses are calculated from EBIT.
Accumulated depreciation is projected at the historical average of 52 percent as a percentage of
PPE. There is no indication of management changing its capital structure in the future, so longterm debt remains at a constant percentage of sales of three percent.
Consolidated Balance Sheet
($MM)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Cash And Equivalents
828.0
1388.1
954.2
1856.7
2133.9
2291.1
1817.2
1944.4
2080.5
2205.3
2293.5
Short Term Investments
400.8
436.6
1348.8
990.3
642.2
1164.0
972.6
1040.6
1113.5
1180.3
1227.5
Total Receivables
2120.2
2262.1
2382.9
2494.7
2795.3
2883.9
2976.4
3184.7
3407.6
3612.1
3756.6
Total Current Assets
Net Property, Plant &
Equipment
5528.6
6351.1
7346.0
8076.5
8839.3
9734.0
8839.2
9489.7
10154.0
10763.2
11193.8
Assets
Total Assets
1611.8
1605.8
1657.7
1678.3
1891.1
1957.7
2080.9
2226.6
2382.5
2525.4
2626.4
7908.7
8793.6
9869.6
10688.3
12442.7
13249.6
12088.7
12920.5
13778.7
14565.7
15121.9
780.4
775.0
952.2
1040.3
1287.6
1031.9
1160.2
1241.4
1328.3
1408.0
1464.3
Liabilities
Accounts Payable
785.4
926.1
1033.4
1120.0
1475.7
1559.3
1303.9
1395.2
1492.9
1582.5
1645.7
Total Current Liabilities
Accrued Exp.
2030.5
1999.2
2612.4
2584.0
3321.5
3277.0
3092.2
3312.3
3533.7
3736.8
3880.3
Long-Term Debt
682.4
687.3
410.7
409.9
441.1
437.2
641.3
686.2
0.0
0.0
0.0
0.0
0.0
0.0
(1,462.1)
(1,383.0)
(1,573.7)
3126.7
3149.1
3584.1
3662.6
4617.1
4556.2
4466.1
4782.4
5106.7
5404.1
5614.3
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
887.8
1182.9
1447.3
1960.0
2497.8
2871.4
2871.4
2871.4
2871.4
2871.4
2871.4
3982.9
4396.5
4713.4
4885.2
5073.3
5451.4
5842.7
6298.7
6786.2
7302.6
7839.3
4782.0
5644.5
6285.5
7025.7
7825.6
8693.4
9084.7
9540.7
10028.2
10544.6
11081.3
7908.7
8793.6
9869.6
10688.3
12442.7
13249.6
12088.7
12920.5
13778.7
14565.7
15121.9
Excess Funds Required
Total Liabilities
(1,402.7)
(1,356.3)
Equity
Common Stock
Additional Paid In Capital
Retained Earnings
Total Equity
Total Liabilities And Equity
16
Return on Invested Capital
Our model projects an ROIC that is consistent with management’s expectations earning a rate
between 15 and 20 percent. We calculated ROIC as:
NOPAT / (Assets – excess funds required – non-interest bearing current liabilities)
Historically, Nike’s ROIC averages 18%, and we believe this rate to slightly increase due to
moderate growth in emerging markets in the near-term.
ROIC
Base case WACC
Excess Return on WACC
2004
17.5%
8.9%
8.6%
2005
18.7%
8.9%
9.8%
2006
19.0%
8.9%
10.1%
2007
17.6%
8.9%
8.7%
2008
17.8%
8.9%
8.9%
2009
16.1%
8.9%
7.2%
2010
15.6%
8.9%
6.7%
2011
20.6%
8.9%
11.7%
2012
20.9%
8.9%
12.0%
2013
20.8%
8.9%
11.9%
INVESTMENT SUMMARY
Nike is a profitable company with good growth prospects, great cash flows, and high returns to
shareholders through dividends and share repurchases. Historically Nike’s payout ratio is nearly
80 percent of earnings, and management has achieved this consistently over the last five years.
Nike’s exposure to several emerging markets provides the Company strong growth prospects,
while its market position in developed markets acts as a hedge against the volatility of emerging
economies. However, we believe these strong cash flows and future shareholder payouts are
already factored into the price by the market with a small irrational premium also included. We
continue to recommend a hold position on Nike stock.
References:
All product and regional information as well as historical financial statement data was obtained
from 10-Qs, 10-Ks, and related sheets found at Nike’s investor relations website, Nikebiz.com
and from Capital IQ. Relative valuation and additional data was obtained from
finance.yahoo.com, Thomson, EDGAR, and Morningstar.
17
2014
20.3%
8.9%
11.4%
18
APPENDIX
Revenue Breakdown (millions)
Projections
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
3070.40
3358.20
3832.20
4067.20
4326.80
4110.46
4357.09
4618.51
4849.44
5091.91
5346.51
9%
14%
6%
6%
-5%
6%
6%
5%
5%
5%
1457.70
1591.60
1716.10
1745.10
1657.85
1757.32
1862.75
1955.89
2053.69
2156.37
2%
9%
8%
2%
-5%
6%
6%
5%
5%
5%
313.4
298.70
323.80
306.10
281.61
281.61
287.24
301.61
313.67
326.22
13%
-5%
8%
-5%
-8%
0%
2%
5%
4%
4%
5129.30
5722.50
6107.10
6378.00
6049.92
6396.02
6768.51
7106.94
7459.27
7829.09
7%
12%
7%
4%
-5%
6%
6%
5%
5%
5%
US: Market Growth and Market Share by Region and Product
Footwear Market Total
NKE Mkt Share
Revenues
Yoy% Growth
Apparel Market Total
NKE Mkt Share
Revenues
1433.50
Yoy% Growth
Equipment Market Total
NKE Mkt Share
Revenues
277.9
Yoy% Growth
Total Revenues- USA
4781.80
Yoy% Growth
2004
2005
2006
2007
2008
2500.00
2454.30
2608.00
3112.60
12%
-2%
6%
19%
2009
2010E
2011E
2012E
2013E
2014E
3174.85
3397.09
3634.89
3816.63
4007.46
4207.84
2%
7%
7%
5%
5%
5%
Europe Middle East & Africa (EMEA): Market Growth and
Market Share by Region and Product
Footwear Market Total
NKE Mkt Share
Revenues
Yoy% Growth
2232.2
Apparel Market Total
1
NKE Mkt Share
Revenues
1333.80
Yoy% Growth
1497.10
1559.00
1757.20
2083.50
2125.17
2231.43
2387.63
2507.01
2632.36
2763.98
12%
4%
13%
19%
2%
5%
7%
5%
5%
5%
284.50
313.30
358.10
424.30
424.30
454.00
485.78
514.93
540.67
562.30
9%
10%
14%
18%
0%
7%
7%
6%
5%
4%
4281.60
4326.60
4723.30
5620.40
5724.32
6082.52
6508.30
6838.57
7180.50
7534.12
12%
1%
9%
19%
2%
6%
7%
5%
5%
5%
Equipment Market Total
NKE Mkt Share
Revenues
261.70
Yoy% Growth
Total Revenues- EMEA
3827.70
Yoy% Growth
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
962.90
1044.10
1159.20
1499.50
1559.48
1699.83
1835.82
1964.33
2082.19
2207.12
13%
8%
11%
29%
4%
9%
8%
7%
6%
6%
755.50
815.60
909.30
1140.00
1185.60
1292.30
1395.69
1493.39
1582.99
1677.97
23%
8%
11%
25%
4%
9%
8%
7%
6%
6%
178.90
194.10
214.90
242.20
242.20
261.58
279.89
296.68
314.48
330.20
25%
8%
11%
13%
0%
8%
7%
6%
6%
5%
1897.30
2053.80
2283.40
2881.70
2987.28
3253.71
3511.39
3754.39
3979.66
4215.29
18%
8%
11%
26%
4%
8%
8%
7%
6%
6%
Asia Pacific: Market Growth and Market Share by Region and
Product
Footwear Market Total
NKE Mkt Share
Revenues
855.3
Yoy% Growth
Apparel Market Total
NKE Mkt Share
Revenues
612.3
Yoy% Growth
Equipment Market Total
NKE Mkt Share
Revenues
143.20
Yoy% Growth
Total Revenues- Asia Pacific
Yoy% Growth
1610.80
2
2004
2005
2006
2007
2008
2009
2010E
478.60
635.30
679.60
792.70
832.34
890.60
17%
33%
7%
17%
5%
7%
169.10
201.80
193.90
265.40
278.67
6%
19%
-4%
37%
48.10
67.80
79.00
31%
41%
695.80
15%
2011E
2012E
2013E
2014E
952.94
1010.12
1070.72
1134.97
7%
6%
6%
6%
298.18
319.05
338.19
358.48
376.41
5%
7%
7%
6%
6%
5%
96.00
96.00
102.72
108.88
115.42
121.19
127.25
17%
22%
0%
7%
6%
6%
5%
5%
904.90
952.50
1154.10
1207.01
1291.50
1380.87
1463.73
1550.39
1638.62
30%
5%
21%
5%
7%
7%
6%
6%
6%
Americas (Central and South): Market Growth and Market Share
by Region and Product
Footwear Market Total
NKE Mkt Share
Revenues
408.2
Yoy% Growth
Apparel Market Total
NKE Mkt Share
Revenues
159.5
Yoy% Growth
Equipment Market Total
NKE Mkt Share
Revenues
36.8
Yoy% Growth
Total Revenues- Americas
604.50
Yoy% Growth
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
1735.7
1947.1
2259.6
2592.8
22%
12%
16%
15%
2722.44
2940.24
3175.45
3397.74
3601.60
3781.68
5%
8%
8%
7%
6%
5%
13739.70
14954.90
16325.90
18627.00
19176.10
18792.58
20108.06
21515.62
22806.56
23718.82
12%
9%
9%
14%
3%
-2%
7%
7%
6%
4%
Other: Market Growth and Market Share by Region and Product
Total Revenues- Other
1428.30
Yoy% Growth
Total NKE Revenue
Yoy% Growth (actual/estimate)
12253.10
3
2010 Quarterly % of Sales
Revenue
Other Revenue
Total Revenue
Cost Of Goods Sold
Gross Profit
Selling General & Admin Exp.
FQ3/CQ1
4,733.0
% of sales
FQ2/CQ4
4,405.6
-
% of sales
FQ1/CQ3
4,798.5
-
% of sales
Avg % of sales
-
4,733.0
100%
4,405.6
100%
4,798.5
100%
2,515.0
53%
2,444.9
55%
2,583.0
54%
2,218.0
1,563.8
1,960.7
33%
1,478.6
2,215.5
34%
1,546.1
R & D Exp.
-
-
-
Depreciation & Amort.
-
-
-
Amort. of Goodwill and Intangibles
-
-
-
Other Operating Expense/(Income)
-
-
-
100%
54%
0%
32%
33%
0%
Other Operating Exp., Total
Operating Income
Interest Expense
1,563.8
33%
654.2
(0.9)
1,478.6
34%
482.1
0%
(1.6)
1,546.1
0%
0%
0%
32%
33%
669.4
0%
(1.3)
0%
0%
Interest and Invest. Income
Net Interest Exp.
Currency Exchange Gains (Loss)
Other Non-Operating Inc. (Exp.)
EBT Excl. Unusual Items
-
-
-
0%
(0.9)
0%
(1.6)
0%
(1.3)
-
0%
(14.9)
0%
27.7
1%
8.6
0%
25.4
1%
-
0%
661.9
491.0
695.8
0%
0%
0%
0%
4
Restructuring Charges
-
-
-
Impairment of Goodwill
-
-
-
Gain (Loss) On Sale Of Assets
-
-
-
Asset Writedown
-
-
-
Other Unusual Items
-
-
(14.6)
491.0
681.2
165.5
115.6
168.2
496.4
375.4
513.0
Earnings of Discontinued Ops.
-
-
-
Extraord. Item & Account. Change
-
-
-
EBT Incl. Unusual Items
661.9
Income Tax Expense
Earnings from Cont. Ops.
Net Income
5%
n/a
0%
0%
0%
496.4
10%
375.4
9%
513.0
11%
2004
504.4
2005
648.2
2006
749.6
2007
708.4
2008
619.5
2009
469.8
1,449.7
1,859.5
2,141.3
2,199.6
2,502.6
35%
35%
35%
32%
25%
Annual Tax Rates
Income Tax Expense
EBT Incl. Unusual Items
14%
Implied Tax-Rate
10%
Avg Tax-Rate
1956.5
32%
Regional Breakdown
Namerica
Footwear
Central and Eastern Europe
Reve
Yoy%
Q1
Q2
Q3
1218.
6 981.2
-4%
-4%
Q1
Footwear
Q2
Q3
Reve
158.9
144
Yoy%
-32%
-18%
5
Yoy% (w/out
currency)
Apparel
Equipmen
t
Total
-3%
-4%
Yoy% (w/out currency)
-21%
-16%
443.9
440.9
Reve
97.4
99.4
Yoy%
Yoy% (w/out
currency)
-9%
-6%
Yoy%
-37%
-30%
-8%
-6%
Yoy% (w/out currency)
-28%
-27%
Reve
97.6
74.3
Reve
29.9
16.9
Yoy%
Yoy% (w/out
currency)
-5%
1%
Yoy%
-29%
-32%
-5%
1%
Yoy% (w/out currency)
-16%
-28%
1760.
1
1496.
4
Reve
286.2
260.3
-5%
-4%
Yoy%
-33%
-24%
-5%
-4%
Yoy% (w/out currency)
-23%
-21%
Reve
Reve
Yoy%
Yoy% (w/out
currency)
Apparel
Equipment
Total
Greater
China
Western Europe
Q1
Footwear
Q2
Q3
Reve
635.4
514.8
Yoy%
Yoy% (w/out
currency)
-15%
0%
-5%
-1%
Q1
Footwear
Q2
Q3
Reve
218.4
209.5
Yoy%
-17%
-1%
Yoy% (w/out currency)
-17%
-1%
6
Apparel
Equipmen
t
Total
Reve
392.6
323.4
Yoy%
Yoy% (w/out
currency)
-21%
Reve
168.1
169.8
-15%
Yoy%
-16%
-7%
-11%
-16%
Yoy% (w/out currency)
-16%
-7%
Reve
77.2
63.4
Reve
29
24.6
Yoy%
Yoy% (w/out
currency)
-26%
-11%
Yoy%
-16%
-2%
-17%
-12%
Yoy% (w/out currency)
-16%
-2%
1105.
2
901.6
Reve
415.5
403.9
-18%
-6%
Yoy%
-16%
-3%
-8%
-8%
Yoy% (w/out currency)
-17%
-3%
Reve
Yoy%
Yoy% (w/out
currency)
Apparel
Equipment
Total
Yuan stayed stable
Emerging Markets
Q1
Footwear
Reve
Yoy%
Yoy% (w/out
currency)
Q2
278.9
369.9
-6%
12%
11%
17%
Q3
Japan
Q1
Footwear
Q2
Q3
Reve
97.5
103.8
Yoy%
4%
6%
Yoy% (w/out currency)
6%
-8%
7
Apparel
Reve
107.2
143.4
-9%
7%
9%
13%
Yoy%
Yoy% (w/out
currency)
Equipmen
t
Total
Reve
35.7
41.3
Yoy%
Yoy% (w/out
currency)
-19%
-13%
-4%
-8%
Reve
421.8
554.6
-8%
8%
9%
14%
Yoy%
Yoy% (w/out
currency)
Apparel
Equipment
Total
Reve
66.7
97.9
Yoy%
-8%
-10%
Yoy% (w/out currency)
-17%
-21%
Reve
21.8
20.7
Yoy%
5%
0%
Yoy% (w/out currency)
-5%
-13%
Reve
186
222.4
Yoy%
0%
-2%
-10%
-14%
Yoy% (w/out currency)
Emerging Mkt currencies seemed to have depreciated relative to
the dollar
Yen seems to have appreciated meaning gains for $
donominated currency
Other Businesses (Cole Han, Hurley, etc)
Q1
Total
Reve
Yoy%
Yoy% (w/out
currency)
Q2
Q3
603.9
55.6
-5%
1%
-3%
1%
8
Total NKE brand by product
Footwear
Reve
Yoy%
Yoy% (w/out
currency)
Apparel
Equipmen
t
Q1
Q2
Q3
2607. 2323.
7
2
2656
-10%
-1%
7%
-5%
-1%
2%
1275.
9
1274.
8
1161.
7
Yoy%
Yoy% (w/out
currency)
-16%
-10%
3%
-11%
-10%
-3%
Reve
291.2
241.2
242.3
Yoy%
Yoy% (w/out
currency)
-16%
-8%
2%
-11%
-8%
-3%
Reve
Overall the world's currency depreciated relative to the $, the dollar relatively appreciated
The global economy had lagging recessions post 2009
for the US
9
Income Statement (in
millions, except EPS)
Projectio
ns
"Normalize
d" % of
Sales- (Avg
used in
projections
for 20102014)
2004
2005
2006
2007
2008
2009
2010E
12,253.1
13,739.7
14,954.9
16,325.9
18,627.0
19,176.1
18,792.6
-
-
-
-
-
-
-
other
rates
2011E
2012E
2013E
2014E
20,108.1
21,515.6
22,806.6
23,718.8
-
-
-
-
20,108.1
21,515.6
22,806.6
23,718.8
Revenue
Other Revenue
Total Revenue
100%
12,253.1
13,739.7
14,954.9
16,325.9
18,627.0
19,176.1
18,792.6
7,001.4
57%
7,624.3
55%
8,367.9
56%
9,165.4
56%
10,239.6
55%
10,571.7
55%
10,148.0
54%
10,858.4
54%
11,618.4
54%
12,315.5
54%
12,808.2
54%
5,251.7
6,115.4
6,587.0
7,160.5
8,387.4
8,604.4
8,644.6
9,249.7
9,897.2
10,491.0
10,910.7
3,388.5
28%
3,955.2
29%
4,186.0
28%
4,749.1
29%
5,640.9
30%
5,802.7
30%
5,261.9
28%
5,630.3
28%
6,024.4
28%
6,385.8
28%
6,641.3
28%
-
-
-
-
-
-
-
-
-
-
-
313.5
10%
266.5
8%
291.8
9%
279.6
8%
312.8
8%
346.9
8%
365.1
8%
-
-
-
-
-
-
-
-
-
-
-
3,702.0
4,221.7
4,477.8
5,028.7
1,549.7
1,893.7
2,109.2
2,131.8
Cost Of Goods Sold
% of Sales
54%
Gross Profit
Selling General & Admin
Exp.
% of Sales
R & D Exp.
28%
Depreciation & Amort.
% of PPE
Amort. of Goodwill and
Intangibles
Other Operating
Expense/(Income)
Other Operating Exp.,
Total
390.6
418.0
443.1
460.8
8%
8%
8%
8%
-
-
-
-
-
-
-
-
-
-
-
5,953.7
6,149.6
5,940.7
6,020.9
6,442.4
6,828.9
7,102.1
2,433.7
2,454.8
2,703.9
3,228.8
3,454.8
3,662.1
3,808.6
8%
Operating Income
10
Interest Expense (Avg
4.1%)
Interest and Invest.
Income
Net Interest Exp.
Currency Exchange Gains
(Loss)
Other Non-Operating Inc.
(Exp.)
EBT Excl. Unusual Items
(25.0)
(4.8)
-
-
-
(29.8)
36.8
67.2
77.1
9.5
47.7
47.7
47.7
47.7
47.7
15.8
13.5
11.5
10.0
-
-
-
-
-
-
-
-
(25.0)
(4.8)
36.8
67.2
77.1
9.5
17.8
-
-
-
-
(76.6)
43.4
15.0
(31.9)
(34.1)
(36.2)
(37.6)
0%
0%
(74.7)
(29.1)
(4.4)
(28.0)
8.1
45.1
47.5
1,450.0
1,859.8
2,141.6
2,171.0
2,442.3
2,552.8
2,784.2
-
-
-
-
-
(195.0)
-
Restructuring Charges
3,244.6
3,468.4
3,673.6
3,818.6
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0%
Impairment of Goodwill
0%
-
Gain (Loss) On Sale Of
Assets
Asset Writedown
Avg Invst
Income:
47.7
-
-
-
-
-
(199.3)
0%
-
-
-
14.7
60.6
-
0%
-
-
-
-
(202.0)
-
Other Unusual Items
0%
-
-
-
14.2
-
-
-
1,450.0
1,859.8
2,141.6
2,199.9
2,502.9
1,956.5
2,784.2
504.4
648.2
749.6
708.4
619.5
469.8
900.0
35%
35%
35%
32%
25%
24%
32%
945.6
1,211.6
1,392.0
1,491.5
1,883.4
1,486.7
1,884.2
-
-
-
-
-
-
-
EBT Incl. Unusual Items
Income Tax Expense
Effective Tax Rate %
Earnings from Cont.
Ops.
Earnings of Discontinued
Ops.
Extraord. Item &
Account. Change
Net Income
Net Profit %
Avg Tax
Rate going
fwd
3,244.6
3,468.4
3,673.6
3,818.6
1,048.8
32%
1,121.1
32%
1,187.4
32%
1,234.3
32%
2,195.8
2,347.3
2,486.2
2,584.3
-
-
-
-
-
-
-
-
2,195.8
11%
2,347.3
11%
2,486.2
11%
2,584.3
11%
32%
0%
0%
-
-
-
-
-
-
10%
945.6
8%
1,211.6
9%
1,392.0
9%
1,491.5
9%
1,883.4
10%
1,486.7
8%
1,884.2
10%
11
Yoy% Growth
Pref. Dividends and Other
Adj.
28%
15%
7%
26%
-21%
27%
17%
7%
6%
4%
-
-
-
-
-
-
-
-
-
-
-
945.6
1,211.6
1,392.0
1,491.5
1,883.4
1,486.7
1,884.2
2,195.8
2,347.3
2,486.2
2,584.3
945.6
1,211.6
1,392.0
1,491.5
1,883.4
1,486.7
1,884.2
2,195.8
2,347.3
2,486.2
2,584.3
526.4
525.2
518.0
503.8
495.6
484.9
484.9
484.9
484.9
484.9
484.9
Basic EPS Excl. Extra
Items
$
1.796
$
1.796
$
2.307
$
2.307
$
2.687
$
2.687
$
2.961
$
2.961
$
3.800
$
3.800
$
3.066
$
3.066
$
3.886
$
3.886
$
4.528
$
4.528
$
4.841
$
4.841
$
5.127
$
5.127
$
5.330
$
5.330
Weighted Avg. Diluted
Shares Outstanding
(millions)
539.4
540.6
527.6
509.9
504.1
490.7
490.7
490.7
490.7
490.7
490.7
$
1.753
$
1.753
$
2.241
$
2.241
$
2.638
$
2.638
$
2.925
$
2.925
$
3.736
$
3.736
$
3.030
$
3.030
$
3.840
$
3.840
$
4.475
$
4.475
$
4.783
$
4.783
$
5.067
$
5.067
$
5.267
$
5.267
$
1.073
$
1.147
$
1.214
$
1.262
NI to Common Incl Extra
Items
NI to Common Excl.
Extra Items
Per Share Items:
Weighted Avg. Basic
Shares Outstanding
(millions)
Basic EPS
Diluted EPS
Diluted EPS Excl. Extra
Items
Cash Dividends Declared
Per Common Share
$
0.370
Dividend Payout Ratio %
Total Payout Ratio
$
0.475
21%
$
0.590
$
0.710
$
0.875
21%
22%
24%
23%
$
0.980
32%
66%
77%
88%
90%
75%
24%
Avg
Dividend
and Total
Payout
Ratio:
24%
79%
79%
$
0.920
24%
24%
24%
24%
79%
79%
79%
79%
Avg
Retentin
Ratio:
12
Retention Ratio
Addition to Retained
Earnings
34%
413.6
23%
316.9
12%
171.8
10%
25%
188.1
21%
378.1
21%
21%
391.3
456.0
21%
21%
487.5
21%
516.3
536.7
Balance Sheet (in millions)
Projections
2004
2005
2006
2007
2008
2009
"Normalized"
% of Sales-
2010E
other
rates
2011E
2012E
2013E
2014E
1,944.4
10%
2,080.5
10%
2,205.3
10%
2,293.5
10%
1,040.6
1,113.5
1,180.3
1,227.5
ASSETS
Cash And Equivalents
% of Sales
828.0
1,388.1
954.2
1,856.7
2,133.9
2,291.1
1,817.2
7%
10%
6%
11%
11%
12%
10%
400.8
436.6
1,348.8
990.3
642.2
1,164.0
972.6
3%
3%
9%
6%
3%
6%
5%
1,228.8
1,824.7
2,303.0
2,847.0
2,776.1
3,455.1
2,789.7
23%
30%
35%
40%
33%
40%
34%
2,120.2
-
2,262.1
-
2,382.9
-
2,494.7
-
2,795.3
-
2,883.9
-
2,976.4
10%
Short Term Investments
% of Sales
5%
5%
5%
5%
5%
34%
2,985.0
34%
3,193.9
34%
3,385.6
34%
3,521.0
34%
3,184.7
3,407.6
3,612.1
3,756.6
Total Cash & ST Investments
% of Sales
Accounts Receivable
Other Receivables
-
-
-
-
-
3,184.7
16%
3,407.6
16%
3,612.1
16%
3,756.6
16%
2,644.7
2,829.8
2,999.6
3,119.6
Total Receivables
% of Sales
2,120.2
2,262.1
2,382.9
2,494.7
2,795.3
2,883.9
2,976.4
17%
16%
16%
15%
15%
15%
16%
1,650.2
1,811.1
2,076.7
2,121.9
2,438.4
2,357.0
2,471.7
16%
Inventory
13
% of Sales
13%
13%
14%
13%
12%
364.4
343.0
177.1
5%
4%
2%
n/a
335.6
202.3
3%
165.0
110.2
203.3
11%
6%
10%
219.7
10%
-
203.0
Prepaid Exp.
% of COGS
13%
13%
13%
2%
3%
3%
227.2
272.4
256.2
9%
11%
9%
393.2
266.7
563.3
13%
13%
13%
13%
345.3
369.4
395.3
3%
419.0
3%
435.8
3%
3%
Deferred Tax Assets, Curr.
% of EBIT
Other Current Assets
305.9
9%
327.3
9%
346.9
9%
360.8
9%
9%
-
-
-
-
-
8,839.2
9,489.7
10,154.0
10,763.2
11,193.8
Total Current Assets
5,528.6
6,351.1
7,346.0
8,076.5
8,839.3
9,734.0
3,183.4
3,179.2
3,408.3
3,619.1
4,103.0
4,255.7
4,331.6
26%
23%
23%
22%
22%
22%
23%
23%
4,634.8
23%
4,959.3
23%
5,256.8
23%
5,467.1
23%
(1,571.6)
(1,573.4)
(1,750.6)
(1,940.8)
(2,211.9)
(2,298.0)
49%
49%
51%
54%
54%
54%
(2,250.67)
52%
52%
(2,408.22)
52%
(2,576.80)
52%
(2,731.41)
52%
(2,840.66)
52%
1,611.8
1,605.8
1,657.7
1,678.3
1,891.1
1,957.7
2,226.60
2,382.46
2,525.41
2,626.42
-
-
-
-
-
-
Gross Property, Plant & Equipment
% of Sales
Accumulated Depreciation
% of PPE
Net Property, Plant & Equipment
Long-term Investments
2,080.93
-
-
-
-
-
Goodwill
135.4
135.4
130.8
130.8
448.8
193.5
193.5
193.5
193.5
193.5
193.5
366.3
406.1
405.5
409.9
743.1
467.4
467.4
467.4
467.4
467.4
467.4
266.6
295.2
300.4
392.8
520.4
897.0
507.7
2%
2%
2%
2%
3%
5%
3%
-
-
-
-
-
Other Intangibles
Deferred Tax Assets, LT
% of Sales
Other Long-Term Assets
29.2
543.3
3%
581.3
616.2
640.8
3%
3%
3%
3%
-
-
-
-
-
12,088.7
12,920.5
13,778.7
14,565.7
15,121.9
Total Assets
7,908.7
8,793.6
9,869.6
10,688.3
12,442.7
13,249.6
14
LIABILITIES
Accounts Payable
% of Sales
780.4
775.0
952.2
1,040.3
1,287.6
1,031.9
1,160.2
6%
6%
6%
6%
7%
5%
6%
785.4
926.1
1,033.4
1,120.0
1,475.7
1,559.3
1,303.9
11%
12%
12%
12%
14%
15%
13%
146.0
69.8
43.4
100.8
177.7
342.9
146.8
6.6
6.2
255.3
30.5
6.3
32.0
85.75
1%
1%
62%
7%
1%
7%
118.2
95.0
85.5
109.0
88.0
86.3
23%
15%
11%
15%
14%
193.9
127.1
242.6
183.4
2%
1%
2%
1%
2,030.5
1,999.2
2,612.4
682.4
687.3
6%
5%
-
413.8
6%
1,241.4
1,328.3
1,408.0
1,464.3
6%
6%
6%
6%
1,395.2
1,492.9
1,582.5
1,645.7
13%
13%
13%
13%
146.8
146.8
146.8
146.8
91.7
98.2
104.1
108.2
13%
13%
13%
13%
170.3
182.1
192.9
200.5
16%
16%
16%
16%
266.8
285.5
302.6
314.7
1%
1%
1%
1%
3,312.3
3,533.7
3,736.8
3,880.3
686.2
734.3
778.3
809.5
3%
3%
3%
3%
Accrued Exp.
% of COGS
13%
Short-term Borrowings
146.77
Curr. Port. of LT Debt
% of LT Debt
13%
13%
18%
16%
16%
286.2
224.6
2%
1%
249.34
1%
1%
2,584.0
3,321.5
3,277.0
3,092.2
410.7
409.9
441.1
437.2
641.3
3%
3%
2%
2%
3%
-
-
-
-
-
(1,462.1)
(1,402.7)
(1,356.3)
(1,383.0)
(1,573.7)
462.6
561.0
668.7
854.5
807.4
732.57
783.8
838.7
889.0
924.6
Curr. Income Taxes Payable
% of Income Tax
146.2
Other Current Liabilities
% of Sales
Total Current Liabilities
Long-Term Debt
% of Sales
3%
Excess Funds Required
Def. Tax Liability, Non-Curr.
15
% of Sales
3%
3%
4%
4%
5%
-
-
-
-
-
Other Non-Current Liabilities
4%
4%
34.6
-
4%
4%
4%
4%
4%
-
-
-
-
Total Liabilities
3,126.7
3,149.1
3,584.1
3,662.6
4,617.1
4,556.2
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
2.8
2.8
2.8
887.8
1,182.9
3,982.9
-
4,396.5
-
4,466.1
4,782.4
5,106.7
5,404.1
5,614.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.8
1,447.3
1,960.0
2,497.8
2,871.4
2,871.4
2,871.4
2,871.4
2,871.4
2,871.4
4,713.4
-
4,885.2
-
5,073.3
-
5,451.4
-
5,842.7
6,298.7
6,786.2
7,302.6
7,839.3
-
-
-
-
-
367.5
367.5
367.5
367.5
367.5
Pref. Stock, Redeemable
Total Pref. Equity
Common Stock
Additional Paid In Capital
Retained Earnings
Treasury Stock
Comprehensive Inc. and Other
(91.8)
62.0
121.7
177.4
251.4
367.5
4,781.7
5,644.2
6,285.2
7,025.4
7,825.3
8,693.1
9,084.4
9,540.4
10,027.9
10,544.3
11,081.0
4,782.0
5,644.5
6,285.5
7,025.7
7,825.6
8,693.4
9,084.7
9,540.7
10,028.2
10,544.6
11,081.3
7,908.7
8,793.6
9,869.6
10,688.3
12,442.7
13,249.6
12,088.7
12,920.5
13,778.7
14,565.7
15,121.9
Total Common Equity
Total Equity
Total Liabilities And Equity
Balance Check
Balance
Balance
Balance
Balance
Balance
Balance
Balance
Balance
Balance
Balance
Balance
NWC
3,333.1
4,241.7
4,327.3
4,879.6
5,023.9
5,621.3
5,490.8
5,871.5
6,293.0
6,679.5
6,952.7
16
Statement of Cashflows (in millions)
Projection
s
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
945.6
1,211.6
1,392.0
1,491.5
1,883.4
1,486.7
1,884.2
2,195.8
2,347.3
2,486.2
2,584.3
255.2
257.2
282.0
269.7
303.6
335.0
58.3
9.3
9.8
9.9
9.2
11.9
313.5
266.5
291.8
279.6
312.8
346.9
365.1
390.6
418.0
443.1
460.8
-
-
-
-
(60.6)
-
-
-
-
-
-
-
-
-
-
-
20.7
-
-
-
-
-
-
-
-
-
-
380.6
-
-
-
-
-
-
4.9
11.8
147.7
141.0
170.6
-
-
-
-
-
47.2
63.1
54.2
-
-
-
-
-
-
-
-
19.0
37.6
(38.7)
24.7
(291.9)
(257.7)
-
-
-
-
-
97.1
(93.5)
(85.1)
(39.6)
(118.3)
(238.0)
(92.5)
(208.3)
(222.9)
(204.5)
(144.5)
(55.9)
(103.3)
(200.3)
(49.5)
(249.8)
32.2
(114.7)
(173.0)
(185.1)
(169.8)
(120.0)
255.6
112.4
279.4
85.1
330.9
(220.0)
128.3
81.2
86.9
79.7
56.3
(103.6)
71.4
(37.2)
(60.8)
(11.2)
14.1
594.7
12.7
31.2
28.6
20.2
1,518.5
1,570.7
1,667.9
1,878.7
1,936.3
1,736.1
2,765.2
2,299.0
2,475.3
2,663.3
2,857.2
(214.8)
(257.1)
(333.7)
(313.5)
(449.2)
(455.7)
(75.9)
(303.2)
(324.4)
(297.6)
(210.3)
11.6
7.2
1.6
28.3
1.9
32.0
-
-
-
-
-
(289.1)
(47.2)
-
-
(571.1)
-
-
-
-
-
-
-
-
-
-
246.0
-
-
-
-
-
-
Net Income
Depreciation & Amort.
Amort. of Goodwill and Intangibles
Depreciation & Amort., Total
(Gain) Loss From Sale Of Assets
(Gain) Loss On Sale Of Invest.
Asset Writedown & Restructuring Costs
Stock-Based Compensation
Tax Benefit from Stock Options
Other Operating Activities
Change in Acc. Receivable
Change In Inventories
Change in Acc. Payable
Change in Other Net Operating Assets
Cash from Operations
Capital Expenditure
Sale of Property, Plant, and Equipment
Cash Acquisitions
Divestitures
17
Invest. in Marketable & Equity Securt.
Net (Inc.) Dec. in Loans Originated/Sold
(400.8)
(35.3)
(909.9)
382.4
380.4
(518.7)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(57.5)
(28.0)
(34.6)
(4.3)
(97.8)
144.3
(950.6)
(360.4)
(1,276.6
)
92.9
(489.8)
(798.1)
(75.9)
(303.2)
(324.4)
(297.6)
(210.3)
-
-
-
52.6
63.7
177.1
-
-
-
-
-
153.8
-
-
41.8
-
-
204.1
44.9
48.0
44.1
31.1
153.8
-
-
94.4
63.7
177.1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(206.9)
(90.9)
(24.2)
(255.7)
(35.2)
(6.8)
-
-
-
-
-
(206.9)
(90.9)
(24.2)
(255.7)
(35.2)
(6.8)
-
-
-
-
-
253.6
226.8
225.3
322.9
343.3
186.6
-
-
-
-
-
(419.8)
(556.2)
(761.1)
(985.2)
(1,248.0)
(649.2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(179.2)
(236.7)
(290.9)
(343.7)
(412.9)
(466.7)
-
-
-
-
-
(179.2)
(236.7)
(290.9)
(343.7)
(412.9)
(466.7)
(1,492.9)
(1,739.8)
(1,859.8)
(1,969.8)
(2,047.6)
-
-
-
-
-
-
(2,611.7)
-
-
-
-
-
-
-
55.8
63.0
25.1
-
-
-
-
-
(398.5)
(657.0)
(850.9)
(1,111.5)
(1,226.1
)
(733.9)
(3,900.5)
(1,694.9)
(1,811.7)
(1,925.8)
(2,016.5)
24.6
6.8
25.7
42.4
56.8
(46.9)
118.6
293.2
258.4
643.0
Other Investing Activities
Cash from Investing
Short Term Debt Issued
Long-Term Debt Issued
Total Debt Issued
Short Term Debt Repaid
Long-Term Debt Repaid
Total Debt Repaid
Issuance of Common Stock
Repurchase of Common Stock
Common Dividends Paid
Common and/or Pref. Dividends Paid
Total Dividends Paid
Special Dividend Paid (Plug for 2010)
Other Financing Activities
Cash from Financing
Foreign Exchange Rate Adj.
18
Net Change in Cash
194.0
560.1
(433.9)
902.5
277.2
157.2
(1,211.2)
419.5
632.3
698.4
1,273.5
Check: Total of Op, Invst, Fncing Cf's (before FX adj)
169.4
553.3
(459.6)
860.1
220.4
204.1
(1,211.2)
300.9
339.1
440.0
630.5
w/FX
194.0
560.1
(433.9)
902.5
277.2
157.2
(1,211.2)
419.5
632.3
698.4
1,273.5
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
2013E
2014E
(473.9)
127.2
136.1
124.8
88.2
Check on Change in Cash & Cash Equiv on B/S (Ending Cash Beginning Cash)
560.1
(433.9)
902.5
277.2
157.2
Balance
Balance
Balance
Balance
Balance
Balance
Balance
Balance
2010
1. Change on Other Net Operating Assets
Short Term Investments
Balance
2011
Balance
2012
Balance
2013
2014
594.7
12.7
31.2
28.6
20.2
191.4
(68.1)
(72.8)
(66.8)
(47.2)
(143.0)
(24.2)
(25.9)
(23.7)
(16.8)
16.2
(49.7)
(21.4)
(19.6)
(13.9)
389.3
(35.5)
(38.0)
(34.9)
(24.6)
563.3
-
-
-
-
(255.4)
91.3
97.7
89.6
63.3
(196.1)
-
-
-
-
53.7
6.0
6.4
5.9
4.2
59.9
24.2
11.7
10.8
7.6
51.3
54.9
50.3
35.6
17.5
18.7
17.1
12.1
-
-
-
-
Prepaid Exp.
Deferred Tax Assets, Curr.
Deferred Tax Assets, LT
Other Current Assets
Accrued Exp.
Short-term Borrowings
Curr. Port. of LT Debt
Curr. Income Taxes Payable
Def. Tax Liability, Non-Curr.
(74.8)
Other Current Liabilities
24.7
Other Non-Current Liabilities
(35)
19
Base WACC
Pessimistic
Rf
Mkt Risk
Premium
4%
Optimistic
Rf
Mkt Risk
Premium
6%
beta
0.883
beta
Cost of Equity
9.3%
Cost of Equity
Cost of Debt
4.10%
Cost of Debt
Mkt Cap Weight
94%
Debt Weight
6%
WACC
8.89732%
Scenario
Cost of
Equity
0.04
5%
Mkt Risk Premium
0.07
beta
0.883
8%
Cost of Equity
10.2%
4%
Cost of Debt
0.041
Mkt Cap Weight
0.932751112
Mkt Cap Weight
0.932751112
Debt Weight
0.067248888
Debt Weight
0.067248888
WACC
0.098602901
8.04%
WACC
Pessimistic
8.4%
4.1%
8.0%
Base
9.3%
4.1%
8.9%
10.2%
4.1%
9.9%
Optimistic
Rf
0.883
WACC
Cost of
Debt
4%
Price
$
94.29
$
76.99
$
67.97
Price Bought at: (Feb 11,2010)
62.95
Mkt Cap
Debt Value
30524.455
2001.944572
20
FCF Valuation
2010
2011
2012
2013
2014
NOPAT
1,829.9
2,185.1
2,185.1
2,185.1
2,185.1
(+) Depreciation and Amortization
365.1
390.6
418.0
443.1
460.8
(-) Change in NWC
130.5
(380.7)
(421.5)
(386.5)
(273.2)
(-) CAPEX
(75.9)
(303.2)
(324.4)
(297.6)
(210.3)
(+) Net Debt Issues
257.9
50.9
54.5
49.9
35.3
FCF
2,507.4
1,942.8
1,911.7
1,994.1
2,197.8
LT Growth Rate
4%
Terminal Value
46,672.7
Total FCF
2,507.4
WACC
1,911.7
1,994.1
2,285.7
48,870.5
9%
NPV of FCF's (Enterprise Value)
38,751.7
(-) Total Debt
4466.09084
Equity Value
34,285.6
WA Common Shares Outstanding
Value Per Share
1,942.8
2015
484.9
70.71
21