hey YouTube I'm Jimmy in this video I'm gonna walk through my analysis of Nike
ticker simple nke this is a twenty first video in our series where we're
analyzing all 30 companies in the Dow Jones Industrial Average we're then
going to take that analysis and build three different portfolios a dividend a
value and a growth portfolio you can see a link in the description below to all
the other videos so we could break Nike's business into four main segments
the largest is footwear their second largest is apparel next they have
something that they called other businesses other businesses accounts for
things like Nike golf and converse now footwear and converse are broken out
separately because technically Nike classifies converse as a more casual
footwear and they classify Nike shoes as a more athletic footwear so they
separate them for us and then their smallest segment is called equipment
that includes things like bats gloves things like that now when we read Nike's
financial statements well they actually break their business into into regions
so they have North America's the largest then they have Europe the Middle East
and Africa then they have Asia Pacific and Latin America and then they have the
Greater China area okay so I just wanted to point out the way that they break out
their business now let's look at some of their numbers and see how we can go
about valuing their business now I recently saw that Nike was one of the
best performing stocks in 2018 so as excited to see what their numbers look
like when we pulled down revenue we could see that their revenue has been
climbing each year which has been a pretty good thing next we have net
income when we look at net income we can see that net income has been fairly
consistent except it pulled back in 2018 now I think this is interesting because
like I said Nike had a fantastic 2018 so it was interesting that net income had
pulled back now I also think that this is important to notice because if we
remember revenue rose in 2018 and net income fell the only way this could
happen is if net income margins fell so when we look at net income margins we
can see that they did in fact fall in 2018 so what happened that made Nike
it's one of the top performers of 2018 well first off 2018 was a really bad
year for stocks but I think that a lot of the excitement about Nike has been
reality versus expectations I think that expectations have been consistently low
for Nike and have continued to outperform and really at the end of the
day I think that this comes down to Nike's business plan so Nike's been
undergoing what is it what it's been calling a digital transformation now
just so we're on the same page Nike's fiscal year actually ends in May
so when we say 2018 as far as revenue and earnings that is through May they've
recently closed the second quarter so 2019 the second half of 2018 stock
performance was actually half of 2018 a half of their 2019 so as far as the
digital transformation is concerned in the third quarter of last year Nike
reported digital growth of 18 percent then in the fourth quarter they saw
twenty nine percent growth then in the first quarter they saw twenty four
percent growth and then in the fourth quarter they have reported a 41 percent
pop and digital growth and you may have seen this actually caused a big jump in
the stock I was about two weeks ago so how do we define Nike's digital
transformation well Nike's trying to do a few things first
they want to get everything into the clock they want to get their entire
platform up in the cloud which allows them to integrate all the different data
points that they have so they have their SNKRS website they have Nike Plus they
have a few Nike Plus apps they have a running app there training apps they
have their social media platforms everything they want to take all of that
that data push it together and use it to truly study the customer the more they
study in theory the the better they'll be able to sell more specifically more
customized to the customer the other thing this is done for Nike is to assist
them in their marketing so instead of paying for advertising spots or
sponsorships or really in addition to advertising and sponsorships what they
do is by pushing their stuff through the digital platform they allow some of the
top influencers on the internet to push their gear for them now this works out
very well because it both saves them some advertising costs and helps push
their products to the right customer now all this may be great from a digital
perspective when it comes to building Nike's brand but what will it do for
revenue and profits so this is where it gets interesting
one of the reasons to go digital is to be able to go direct to consumer margins
are much better if you don't have to sell to a distributor first along those
same lines in the middle of 2018 Nike bought a tech startup called virgin
mega which helps them with their user experience specifically in apps now
right before that purchase and I keep on something called Zodiac zodiac is a data
is data analytics firm and I think that all of those acquisitions and everything
Nike is doing is in heading in the right direction as far as making a positive
digital shift now their digital transformation isn't the only thing
happening with Nike although I do think that's great and has the potential to
give them a competitive advantage over some of their peers so before we get
into valuing Nike stock let's look more broadly at the business one interesting
point that I noticed when I was doing my research is that they're revamping their
production process and they recently invested in an assembly process change
that essentially cuts their labor in half and cuts their manufacturing the
steps to manufacture a shoe by about a third now once again all of this gears
towards improving Nike's margins over the long run which we recently saw had a
pullback so if they could pull that off over the
next few years I would expect their margins to get better now there's
something else to keep in mind Nike is a global company and as is true with
pretty much any global company currency risk is something that we should pay
attention to current although currency will usually be adjusted in the earnings
as a company we do come out and adjust it for you
but I bring this out because in the most recent quarterly report I was reading
about it and Nike came out and said that they they had increased their revenue by
10 percent then they went on to say that that 10 percent was actually a 14
percent increase but their revenue the currency adjustments shifted it down
from 14 percent to over to 10 percent now just so we're all on the same page
this is a chart of the US dollar in Nikes second quarter and as we could see
the dollar got stronger through the quarter and what this means for us is
that all the money that Nike earned overseas all the revenue that came in
well that revenue has to be adjusted back into US dollars because US
dollars are getting more expensive they need more revenue to get to the same
amount of dollar number so that explains the difference between 14% is what
revenue grew overseas but then when they brought it back they actually gave up 4%
because the dollar was getting stronger no as I said this is adjusted from
quarter to quarter or year to year but I just mention it so we can keep it in
the back of our minds because if we ever see the dollar going crazy or falling
off a cliff well either way we know that will affect both revenue and earnings so
that's just something to keep in the back of our mind okay now we're gonna
jump over valuation but and right after that actually want to touch on something
that I like to do to help monitor a company to see if we think that
company's a good when it when is a good time to sell and I like to do it when
I'm first setting up to add a company to my portfolio
so I'll bring that out in a second so for valuation I think we can use a price
to earnings ratio now typically I like to use discounted cash flow but I think
p/e works well here and it's a popular valuation tool to use plus it's sort of
ties into the part that I mentioned about when to sell stock so we'll come
back to that in a second so for now let's look at Nikes own p/e multiples
well their current p/e is about 25 X this is their forward PE and when we look at
their one-year average it's about 27 X and both three and five-year averages
are 21 X now when we look at some peers something like Under Armor well Under
Armor is trading at 61 X now that's a little bit tricky because they're just a
little bit profitable at least on a forward p/e basis so that might not be
the best one to use from a valuation perspective if I were if I were
analyzing Under Armor I wouldn't be using p/e then if we jump to adidas well
their forward p/e is about 22 X now actually think that Nike should be
trading at a premium to Adidas and that's mostly because in some of the
economies that they both compete in specifically Western Europe well adidas
has struggled where Nike has really continued to do well that was some of
the headwinds that analysts expected in the most recent quarter and Nike
outperformed there one of the reasons I think the stock jumped at least
initially plus I think that Nike's long-term plan when it comes to
improving margins and improving the digital platform allows for them to be
training at a premium so let's say we're gonna stick with the 1 year average of
27 X well if we apply 27 X to their anticipated earnings per share of $2 and
88 cents over the next four quarters well we would end
up with a fair value of about $78 per share right now the stock is trading at
about $74 per share which for me means that it's pretty close to being fairly
valued okay so I like Nike from a growth perspective I like where they're going I
think that it has the potential to get better and better from a growth story
from a value story probably not as much but let's pretend the stock fell and we
got involved we'll pretend that we buy it for growth perspective when do we
know how do we know whether or not the stock is playing out well for us and
when do we get up so personally I like to put something like this together now
this quarterly estimates going out the next few years I usually like to add
annual but we'll just look at the quarterly for now q1 and q2 of 2019 are
already in that's why they're in red or orange or whatever color that is now I
think what I think this is important because analyst estimates are notorious
for changing analysts are always changing their mind based on what just
happened and that could be a good thing but when we get into a stock we're
getting into it because we believe this or something like this will happen from
an earnings per share perspective okay now if we switch this table to a chart
well this is what I expected earnings per share would look like from a chart
perspective now what if I told you that the stock Nike stock did this through
2020 and let's also imagine that earnings per share came out exactly as
we predicted it wouldn't but let's pretend it was close well I bring this
up because I actually think that the price of the stock is somewhat
unimportant in this whole thing the fact that the stock has fallen in my
opinion should be secondary to what's actually happening with the company
itself and I think the same thing could be true at the portfolio level so let's
imagine that we own 500 shares of Nike stock and since we're owners of the
company we could in theory take their earnings per share and apply it to our
own business or our portfolio so if we own five hundred shares of Nike and they
were to earn let's say next quarter they were going to earn 67 cents per share
well that would mean that a portfolio had earnings of three hundred
thirty-five dollars that's the 500 shares times 67 cents now let's imagine
that we own two other companies in there we own ABC and XYZ well we have 50
shares of ABC and they're expected to earn four dollars
and 58 cents per share so this could be an additional $229 in earnings to
our portfolio then XYZ is supposed to earn $2.18 cents per share we have
200 shares so that would bring in another $436 for our portfolio so our
goal is to consistently increase the value of our portfolio each and every
year this is similar to what Warren Buffett does with Berkshire Hathaway so
when we look at it like this the price we pay impacts the number of shares we
could buy nothing more the price of the stock doesn't all affect our earnings
per share and frankly quarterly is probably a bit short-sighted it makes
more sense I like it better to look at it from an annual perspective but then
either way the concept remains the same if we look at our portfolio as a way to
generate income and not necessarily dividends dividends are a part of them
that gets incorporated into it but it's also what does the earnings per share
how do they apply to our particular shares so if we were to jump in we were
to buy Nike and Nike were to consistently come up just short on all
of their earnings per share and each year what we thought let's say we
projected out the next five years on an annual basis and each year we had to
reduce what those earnings would be well when we're researching another company
we might find another company that has better value that would produce more
earnings per share for our portfolio that being said I think that it makes
sense to shift our perspective to look at a portfolio as a business and then to
acquire other pieces of the business for me that's how I like to look at every
individual holding now going back to Nike's valuation I actually think that
Nike's pretty fairly valued right here from a dividend portfolio perspective I
don't think it makes sense there because Nike's dividend is just a bit over 1%
their dividend yield is a bit just a bit over 1% from a value perspective like I
said we're calculating about a 78 valuation I actually did discounted
cash flow I don't have the numbers up here but it was slightly above that I'd
like to see it in the 60s if we're gonna buy it from a value perspective but
that's just me from a growth perspective it might make sense I actually think
that they have a good chance of outperforming our projected earnings per
share so from a portfolio perspective as we just pointed out as I just sort of
Illustrated I think it might make sense to do to add
it to the Growth Portfolio if we think that they can outperform in the earnings
per share perspective but what do you think do you think that Nike belongs in
any of our portfolios let me know what you think in the comments below
if you haven't done so already hit the subscribe button thank you for sticking
with me all the way into the video and I'll see you in the next video thanks
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