About the paper
The paper is commissioned to provide a detailed analysis of Nike Inc’s stock for the client of our company. While the eventual objective is to provide a rational and non-bias recommendation on the stock to the client, however, adhering to the professional standard of performing the analysis with due diligence, selecting the stock as per client’s suitability and supporting our recommendation with appropriate research work, we aim to be comprehensive in our analysis approach while appraising the company’s stock. Therefore, before initiating the financial analysis of the company using financial ratios and stock price analysis, we will be discussing the reason for selecting the stock and how its profile suits the client’s investment objectives.
About the company
Founded in the year 1964 as Blue Ribbon Sports Inc. and headquartered in Oregon, United States, Nike Inc. is an American multinational entity that deals in athletic apparels, sports footwear and related accessories which it sells through company owned retail stores, online platform and independent distributors and licensees. With the market capitalization of $104.70 billion and a market share of 15% in the global sportswear industry, the company is leader of sport apparel and footwear industry. The brand value of the company is valued at $19 billion, making it one of the most valuable brand in the world. .
Rationale for selecting the stock
While the majority of the analysts were busy following the tech stocks, Nike Inc. was one participant of the capital market that continued to show phenomenal growth even during the turbulent times. Although the company targets consumer discretionary sector and is prone to cyclical changes in the economic cycles, however, amid the growing awareness of the importance of fitness amongst the consumers of all sections, the company has witnessed significant growth over the past decade. Most importantly, while the products of the company are labeled fitness wear, however, over the years, the company’s apparels and shoes have turned regular fear and not just gym or track-wear. This consumer centric approach has ensured strong performance by the company even at times of economic instability.
On the other hand, research reports published by multiple research firms are also going bullish on the future outlook of the sports apparel industry. According to the report released by Allied Market Research, the world sports apparel market is expected to generate revenue figures of $184.6 billion by 2020 with a cumulative annual growth rate of 4.3% from 2015-2020. Additionally, growth in health awareness amongst both the genders, increasing disposable income of the middle-class consumers and a significant surge in the female participation rate in sports and fitness activities, are some of the factors that are expected to drive growth in the sports apparel market.
Even Morgan Stanely has given a rating of ‘Very Bullish’ for the sports apparel industry with a highly optimistic 5-year forecast for the industry with a forecasted sales revenue of $83 billion by 2020, i.e 30% growth from current level.
As for the company’s management efforts to promote the brand, led by CEO, Mark Parker, the management has smartly capitalized on their brand strength and generating value for their shareholders by investing significantly in different markets over the years. It is because of this prudency in the organizational architecture, Nike Inc. has achieved a consistent track record of solid performance over the long-term. One geographic area where the company has shown an astounding success in China with constant currency revenue of 30% from the area. It is considerable that despite of Wall Street analyst’s concerns over the performance of the company in China, the company has proved that it has the strength to deliver solid results even in a challenging environment. Accordingly the combination of vigorous sales growth and rising profit figures has allowed the company to surpass Wall Street expectations over the past seven quarters.
Henceforth, considering the economic and financial fundamentals of the sportswear apparel industry, we believe Nike Inc. can be a good candidate for our client’s portfolio
Suitability for the client
Our client is of 30 years old and have shown willingness to take a calculated risk. The client has a long-term investment horizon and strongly ask stock picking activity to be based on fundamentals. In addition, our clients have also expressed their desire to invest in stocks with vintage history and have strong past performances.
Henceforth, considering the long-term investment horizon of the client and his requirement for stocks with strong fundamentals, Nike Inc. seems a suitable stock for our client.
Ratio Analysis
Post learning about the suitability of the stock for our client, we now head towards unearthing the past three year performance of the company using the tool of financial ratios. As indicated in the introductory section of this report, since the objective of this equity research report is to provide comprehensive analysis of the stock, we will be using multiple ratio sections to achieve the objective. Presented below are the calculated ratios followed by relevant discussion of the three-year trend in the company’s financial position:
a) Liquidity Analysis
These ratios help the analysts in understanding the working capital position of the company and how capable it is to honor its short-term obligations.
-Current Ratio: Current Assets/ Current Liabilities
-Quick Ratio: (Cash+ Receivables)/Current Liabilities
Referring to the above tables, we can see that over a bearish trend in the liquidity position of the company. Beginning with the current ratio, the multiple plummeted from 3.47 in 2013 to 2.52 in 2015 on account of higher proportionate increase in the current liabilities relative to the current assets. During 2015, the 16.65% increase in the current asset base was succumbed by a 26% increase in the current liabilities that eventually decreased the current ratio from 2.72 in 2014 to 2.52 in 2015.
We also analyzed the liquidity position using quick ratio and found a similar trend where a relatively higher current liabilities compared to previous years, resulted in lower quick ratio multiple. During 2015, while the cash position increased by a significant 15.21%, however, the effect was succumbed following a 26% increase in the current liabilities. Accordingly, the ratio multiple tumbled from 1.71 in 2014 to 1.47 in 2015.
-Note of Guidance
Important to note, despite of bearish trends in the liquidity ratio of the company over the past three years, we still give a positive rating for the liquidity position of the company as the amount of current assets it holds relative to the current liabilities is still very high and indicates strong short-term solvency of the company. Henceforth, we strongly approve that the working capital position of the company is still quite sound.
b) Profitability Analysis
These ratios indicate how efficiently the company is using its available resources and generating profits from it. The stakeholders of the company are significantly interested in learning about the profitability trend of the company.
-Operating Margin Ratio: Operating Margin/ Revenue
Earnings per share: (Net Income- Preference Dividend)/Weighted Common shares outstanding
-Return on Total Equity: Net Income/ Total Equity
As noted from the above tables, Nike Inc. has consistently recorded high profit margins year-after-year. As for the operating margin, the multiple fueled from 12.86% in 2013 to 13.64% in 2015 on account of higher revenue figures and controlled cost of materials and operating expenses. Important to note, during 2014, the revenue figures of the company surged by 9.82%, however, the company managed to generate this increase with a lower proportion of costs of materials to the revenue figures and controlled increase in the operating expenses. The trend continued in 2015 also as relative to 10.08% increase in the revenue figures, the proportion of costs of materials to the revenue figures went down from 55.23% to 54.03%, while the proportion of operating expenses to the revenue figures increased marginally from 31.53% to 32.53%. It was because of the favorable trends in revenue figures and cost management, the operating margins yet again peaked at 13.64% during 2015.
Another profitability ratio that shows the optimistic outlook of the company is the EPS multiple which has surged from 1.38 to 1.90 on account of higher net income earned by the company every year.
Next, we analyzed the Return on Equity (ROE) multiple of the company. Important to note, ROE is a closely watched financial multiple amongst the investor community as it indicates how well a company's management creates value for its shareholders. Referring to the above table, we can see that over the past three years, Nike Inc. has consistently yielded high ROE for its investors with the multiple surging from 22.28% in 2013 to 25.76% in 2015. The increase is attributed to higher net income of the company that surged from $2485 million in 2013 to $3273 million in 2015.
-Note of Guidance
Analyzing the profitability trend in the company over the past three years, we are left with no doubt that Nike Inc. is efficiently utilizing its resources and is generating sustainable and consistent profits for its shareholders and other stakeholders.
c) Solvency Analysis
These financial ratios allow us to de-code the composition of the capital structure of the company and helps the analysts to unearth the risk embedded in the capital structure.
Debt-Equity Ratio: Total Debt/ Total Equity
As noted from the above table, the debt-equity ratio of the company has been consistently declining year-after-year. This indicates that over the years, Nike Inc. has opted for lower leverage based capital structured and is thus exposing the shareholders to lower risk levels. In addition, at times of strong profitability, this comes as a boon for the shareholders as the trend confirms the strong solvency position of the company.
-Note of Guidance
Equity investors are largely concerned with investing in a company that operates under with high leverage. Many a times, even the most knowledgeable and prudent investors refrain from investing in such companies even though the entity is earning consistently high profit figures. Seeing the trends in the profit figures and debt-equity position of the company, we found that while the profit margins of the company are fueling every year, the leverage position is on the lower side. Henceforth, such optimistic trend largely favors the company and make it as a good candidate to be included in the portfolio.
-Market Ratios
While the above three sections of ratio analysis are useful in judging the financial turned in the company, market based ratios provides indication towards the future outlook of the company and how investors perceives the company to perform over the coming years. As part of market based ratios, we have calculated Price/Earnings(PE) ratio of the company for the past three years:
-PE Ratio: Market Price/ EPS
Referring to the above figures, we can see that PE ratio of the company has been on an increasing trend and has surged from 28.23 in 2013 to 32.90. This indicates that investors are optimistic about the future earning potential of the company are thus willing to place higher dollar bets.
-Note of Guidance
It is considerable that relative to the industry average PE of 25.4, the PE of Nike Inc. is high.However, considering the future potential of the company and its past year’s performances, the premium being demanded by the stock seems completely justified. Henceforth, the trend in the PE ratio confirms that the stock is a strong buy.
Stock Price Analysis
Analyzing the stock price performance of the company over the past three years we see that the stock has yielded outstanding returns for its shareholders. During 2015 alone, the stock yielded a 32% return while S&P 500 struggled with 5% loss during the same time period. On a 3-year holding period basis, the stock has yielded a compounded annual growth rate of 17.64%, proving to be one of the best performing large-cap stock on the Wall Street.
Risk and Mitigation Process- Portfolio Diversification
It is considerable that even though we have witnessed that stock of Nike Inc. is a perfect and sound candidate to be included in the portfolio, but our client must understand that every stock in this universe is embedded with unsystematic risk and systematic risk, and since markets award only systematic risk, it is essential for the client to remove the unsystematic risk through diversification his investments in stocks of industries which are less than perfectly correlated.
Important to note, when an investor diversifies his investment in stocks that are less than perfectly correlated stocks, the weighted average risk of the portfolio is less than that of the individual securities as following the process of diversification, unsystematic risk are eliminated from the portfolio.
Henceforth, in order to eliminate the unsystematic risk from his portfolio, our client must add around 7-8 more stocks from industries that are non-correlated to apparel industry.
Recommendation: Strong Buy
As we have witnessed redundantly through the ratio analysis and stock price analysis, the company has been performing extremely well and considering the outlook for t sportswear apparel industry over the next five years, we believe that the stock will continue to generate high returns for its shareholders. Our analysis is also warranted by analyst following the stock and have also issued a favorable outlook for the stock.
Henceforth, considering the long-term investment horizon of the client, favorable industry economic trends and fundamental trends favoring he company, we issue a ‘Strong Buy’ recommendation for the stock.
References
Analyst Opinion: Nike Inc. (2016). Retrieved March 4, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/ao?s=NKE
Profile: Nike Inc. (2016). Retrieved March 4, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/pr?s=NKE
Cardenal, A. (2015, October 4). Is Now the Right Time to Buy Nike Inc Stock? Retrieved March 4, 2016, from Motley Fool: http://www.fool.com/investing/general/2015/10/04/is-now-the-right-time-to-buy-nike-inc-stock.aspx
Financial Ratios. (n.d.). Retrieved March 4, 2016, from http://www.businessplans.org/ratios.html
Joshi, D. (2015, October 8). World Sports Apparel Market is Estimated to Garner $184.6 Billion by 2020 - Allied Market Research. Retrieved March 4, 2016, from Market Watch: http://www.marketwatch.com/story/world-sports-apparel-market-is-estimated-to-garner-1846-billion-by-2020---allied-market-research-2015-10-08-82032519
Morgan Stanley. (2015, Ocotber 30). Athletic Lifestyles Keep Apparel Sales Healthy. Retrieved March 4, 2016, from http://www.morganstanley.com/ideas/global-athletic-wear-geared-for-growth
Nike Inc. (2015). Annual Report 2015. Nike Inc.
Robinson, T. (2011). Portfolio Risk and Return. In C. Institute, Portfolio Management (pp. 170-172). Boston: Custom.
