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  1. 1. Nike Equity Analysis and Valuation Report Rachel King Tyler Toft March 9, 2016
  2. 2. 1" " Table of Contents Executive Summary .................................................................................................................. 3 Nike Overview and Analysis .................................................................................................... 4 Investments and hedging:............................................................................................................ 5 Litigation:.................................................................................................................................... 6 Endorsements:............................................................................................................................. 7 Risk Factors:................................................................................................................................ 7 Trademarks and Patents: ............................................................................................................. 8 Altman Z:................................................................................................................................... 8 DuPont Analysis: ....................................................................................................................... 9 Industry Overview: ................................................................................................................. 11 Footwear:................................................................................................................................... 11 Apparel:..................................................................................................................................... 13 Industry Ratio Analysis:......................................................................................................... 14 Footwear Ratios: ....................................................................................................................... 14 Apparel Ratios:.......................................................................................................................... 15 Competitor Overview.............................................................................................................. 16 Adidas: ...................................................................................................................................... 16 Deckers:..................................................................................................................................... 18 Competitor Ratio analysis:..................................................................................................... 19 Market Model Regressions..................................................................................................... 20 NKE Regressions: ..................................................................................................................... 21 Industry Portfolios against the Market:..................................................................................... 23 Competitors against the market:................................................................................................ 24 Sales Growth Analysis ............................................................................................................ 25 Factors Tested: .......................................................................................................................... 26 Regression Results: ................................................................................................................... 27 Forecast of Sales: ...................................................................................................................... 31 Depreciation Waterfall ........................................................................................................... 31 Constructing the schedules:....................................................................................................... 31 Comparing numbers:................................................................................................................. 33 Driver Calculations and Forecasting..................................................................................... 36
  3. 3. 2" " Expected Return Models ........................................................................................................ 40 Capital Asset Pricing Model (CAPM): ..................................................................................... 41 Fama French 3 factor Model:.................................................................................................... 41 Stock Valuation ....................................................................................................................... 43 3 Statement Discounted Cash Flow .......................................................................................... 43 Dividend Discount Model......................................................................................................... 45 Comparables.............................................................................................................................. 46 Final Valuation........................................................................................................................ 47 Works Cited............................................................................................................................. 49 Appendix .................................................................................................................................. 50 Appendix 1: Altman Z............................................................................................................... 50 Appendix 2: DuPont.................................................................................................................. 50 Appendix 3: Ratios.................................................................................................................... 51 Appendix 4: Regression Data.................................................................................................... 54 Appendix 5: Sales Growth ........................................................................................................ 57 Appendix 6: Depreciation Waterfall ......................................................................................... 63 Appendix 7: Drivers.................................................................................................................. 68 Appendix 8:Proforma Fincial Statements................................................................................. 69 Appendix 9: Expected Return Models ...................................................................................... 72 Appendix 10: 3 Statement DCF ................................................................................................ 73 Appendix 11: Dividend Discount Model .................................................................................. 75 Appendix 12: Comparables....................................................................................................... 76 "
  4. 4. 3" " ! Executive Summary NYSE: NKE Mar 4 2016 $61.24/share Nike is one of the most recognizable brands today and dominates the footwear and apparel industry on a global level. Nikes current annual sales total $30 billion and hope to grow to $50 billion by 2020. Nikes stellar performance and growth is aided by innovation and product excellence. In this report we analyze all aspects of Nikes company and compare how well Nike performs compared to its top competitors as well as the footwear and apparel industry. We began by looking into the industry Nike competes in. By trade, Nike is a footwear company but has extended its brand into apparel and sports equipment. We decided to compare Nike to both footwear companies and apparel companies to see how strong the NIKE brand is and how well it performs compared to similar companies. To no surprise, Nike outperforms both the footwear and apparel industries in nearly all categories, most notably in operating income and net income. Nikes margin on these two categories is greater than the industry by 4.5 and 8.5 times respectively. Operating Income indicates Nike is better able to lower costs in relation to sales and is more efficient compared to the industry. Similarly, small indirect costs fuel a higher net income, proving Nike is one of the leading brands in these two industries. Digging deeper in comparisons to Nike, we chose Nikes top competitor in the two industries to further analyze Nikes performance. The footwear industrys top competitor to Nike is Deckers and the apparel industry is Adidas. However, Adidas is slowly falling as a top competitor and giving way to the growing company, Under Armour, so we compare Nike to both Adidas and Under Armour in the apparel industry. While Nike far outperforms these 3 companies in annual sales ($30B compared to Adidas $17B, Deckers $1.82B, Under Armour $3.96B), the Gross Profit Margin is similar for all 4 companies. However, Nikes net profit margin is much higher than these companies at 11.55% meaning Nike is more efficient in reducing costs outside of COGS giving them a leg up against top competitors. We also performed an Altman Z-score test and DuPont analysis of Return on Equity. Nikes current Altman Z-score of 9.34 indicates Nike is in no danger of bankruptcy in the future. Additionally, they havent seen any historical signs of financial crisis as this score has consistently been above 5.5 the past 15 years and strengthening. Nikes ROE is 25.8% currently, and after conducting the DuPont analysis we are confident a level this high is sustainable in the future. We then tested how well Nike stock compares to the rest of the mar