Value Investor Daily #16

Nike is down 44%, is it time to buy?

March 19, 2024

Sponsored by

This AI Startup Investment is Winning

Otherweb is the fastest-growing AI platform on the internet. They have developed technology that transforms a $565 billion market.

Investors are taking notice, and here’s why: 

1) They raised $1.9M+ from 2,000+ investors, including founders with $100M+ exits, VCs, angels, executives from Google and Amazon, and more.

2) They grew to over 8 million users in just 15 months. 

3) They are riding a $15.7 trillion wave of AI innovation.

Nike (NKE) is down 44% from its peak.

Source: TradingView

The company reports earnings this Thursday after the close.

Does it make sense to enter here? Let’s take a look.

Why is it down so much? A few factors are weighing down the stock:

  • The stock is still unwinding from pandemic highs

  • In their latest quarterly report, sales were down 1%

  • Management warned of softer demand in the second half of fiscal 2024

  • Nike reduced production due to lower demand

  • Retail partners have slowed ordering and decreased inventory on hold via price cuts

  • Laying off 1,500 staff members didn’t help—the stock is down almost 7% since the announcement

So, the most significant risk factors seem to be macroeconomic headwinds affecting consumer demand and the threat of slower future growth.

Let’s look into the business.

Source: FinChat.io

Sales growth is expected to slow this year to just 1.1% and not rebound until 2025.

The stock trades at 29x earnings and 21x free cash flow. On average, it’s traded at 34x earnings and 39x cash flow in the last five years.

Source: FinChat.io

EPS growth has been negative, at -3.7% in the last twelve months. However, overall earnings have grown by over 9% CAGR since 2014.

Source: FinChat.io

Long-term debt surged in 2020 but hasn’t risen since. LT debt/equity has fallen since then from 153% to 83% today. EBITDA interest coverage is 24x.

Source: FinChat.io

ROE and ROIC are down since 2021 but are still strong overall (and over time) at 36% and 23%, respectively.

What are management’s plans for growth going forward?

CEO John Donahoe is focused on accelerating the rate of product releases, removing inefficiencies, and growing in three key areas: women’s, Jordan brand, and running.

His comments on their women’s segment from the latest earnings transcript:

Today, about 40% of our members are women consumers. They make up a bigger proportion of new members and their demand per member is growing faster. We see great opportunity to better serve this consumer by responding to her needs across the spectrum of performance and lifestyle.

Let me first touch on performance where we're focused on innovating for her to create new opportunities we did not previously served. We've now built a collection of bras and leggings across different price points.

This includes our statement leggings, Zenvy, Go and Universa, all of which are above $100, our price point we were not previously in. These leggings serve her with a whole new approach to fit and comfort, thanks to new material innovation. And we're holistically elevating our retail presentation and storytelling to help her find the right product for her exact needs.

And his comments on the Jordan business:

Over the past few years, we've driven strong growth in the Jordan business by bringing more dimensions into the brand. We're proving that Jordan can be more than retro, more than footwear, more than men's and more than North America. And approach to growth will continue to bring life and growth over the coming years.

And this is just the beginning for Jordan brand as we see even greater growth potential through our plan for deeper investment, which for Jordan will come in areas like merchandising, marketing and marketplace.

For instance, today, Jordan brand performance product is outpacing overall growth with Jordan reigniting it’s on core presence in basketball with the strongest signature portfolio ever as Tatum, Luka, and Zion pushed the brand to new heights, both on and off the court.

Jordan is also expanding beyond basketball into, for example, golf, global football and American football. And Jordan Women's and Kids continues to lead the brand's overall growth. Women's and kids' business share within Jordan have increased seven points over the past three years. And Jordan Apparel is now a roughly $1 billion business, averaging almost 20% growth over the past three years.

Let’s run a quick valuation.

Source: GuruFocus

Assuming:

  • Diluted EPS of $3.42

  • A return to 9% earnings growth (the 10-year average)

  • 9% discount rate

  • Add back tangible book value

In that case, the fair value is $69 vs. today’s price of $99, meaning Nike is still around 40% overvalued.

For the stock to be fairly valued, Nike must grow earnings by around 15% annually.

Source: SeekingAlpha

Wall Street is estimating earnings will grow around 13% per year.

Source: SeekingAlpha

The average price target is $120.

Where might the stock price end up in 10 years?

If earnings grow at 9% and trade at an earnings yield of 4.34%, the price would be $186 by then, a CAGR of 6.5%.

This is a wonderful business with a dominant global brand, a professionally managed team of over 83,000, and A-grade execution. It also has a solid track record for growth and shareholder returns, so it trades at a premium.

Munger says buying a wonderful business at a fair price is okay, but ideally, we still want that fair price, not a premium price.

If Thursday’s earnings report drops that premium partially or completely, it could be worth considering.

Nike continues to buy back its own shares. In the first six months of fiscal 2024, it bought $2.3 billion. Per its $18 billion share repurchase program authorized by the board in 2022, Nike plans to buy another $12 billion through 2026.

Terry Smith holds a 3% position in his $23.8 billion fund.

As always, do your own research before deciding to invest!

Happy investing!

This AI Startup Investment is Winning

Otherweb is the fastest-growing AI platform on the internet. They have developed technology that transforms a $565 billion market.

Investors are taking notice, and here’s why: 

1) They raised $1.9M+ from 2,000+ investors, including founders with $100M+ exits, VCs, angels, executives from Google and Amazon, and more.

2) They grew to over 8 million users in just 15 months. 

3) They are riding a $15.7 trillion wave of AI innovation.