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SofJay (< 20)

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Some Perspective on Nike from a Distance Runner



November 06, 2016 – Comments (0) | RELATED TICKERS: NKE , UAA

Recent Nike downgrade is a buy signal for value investors.

On Monday BofA/Merrill Lynch downgraded Nike from neutral to underperform on the heels of an exceptionally disappointing year for investors siting loss of market share to Under Armor and Adidas.  There is a painfully negative sentiment toward the stock right now which coupled with its current valuation makes it attractive to me.

Let’s not forget that we’re talking about one of the most iconic brands in history.  How many competitors have been bested by Nike?  Answer:  all of them.  Personally, I don’t see a compelling reason to bet against them this time either.  I find it hard to believe that Under Armor is going to steal a lunch here and the thought of a 66 P/E multiple on a stock that’s down 36% year to date makes me cringe.

On a relative basis there’s no comparison.  The scale and scope of Nike’s product offerings are unmatched.  When it comes to shoes they have three of the most recognizable athletes of all time in Jordan, Lebron and Kobe.  The running shoe segment is creative, high tech and is probably one of the most trendy fashion segments out there.  The same can be said about the sportswear and fitness offerings.  The notion that Under Armor is going to turn out the volume of competitive products needed to keep pace year after year is unrealistic and the power of the Nike brand ultimately dashes any hopes of a successful campaign on price.  Don’t be fooled by the cheerleaders, Under Armor will be shaken out of this well established market.

More on value.  Nike has always commanded a premium due to its unrivalled command of the industry and strong brand but the downgrades and poor performance of the stock this year has created an opportunity for value driven investors to buy at a very fair price.

Based on a conservative FCFF valuation, shares should trade around $44.  I used a WACC calculation of 9.4% and assumed 8% annual revenue growth over the next ten years, mirroring what the company has achieved over the previous ten.  I applied the company’s current EV/EBITDA multiple of 16 in the terminal year.  Mind you, these assumptions do not capture the value of the brand which just last year propelled the stock to $67 a share.  Given all the noise in the market and the lack of support at the current share price, I wouldn’t be surprised to see shares trade down to this level in which case I would be a very satisfied shopper.  

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