Is Nike’s Stock Fairly Priced? How Much Can It Grow From Here?

My latest article for Seeking Alpha forecasts Nike, Inc.’s earnings and determines its intrinsic value.

Summary

  • Nike is a strong brand showing consistent revenue growth and excellent financial health.
  • Nike’s revenue and earnings outlook for the next 5 years shows a continued ability to generate superior growth and dominate the industry.
  • An estimated intrinsic value for shares of Nike based on best- and worst-case scenarios for the company, industry, and economy.

In analyzing stock valuations, people often use the price-to-earnings ratio as a shortcut. The problem is, it is just that a shortcut. It is the stock price divided by the trailing 12 months’ earnings per share. It is a simple measurement of past performance in a complex system that cannot be reduced to one number. P/E is a screening tool at best. It does not tell us enough about the most important factors of stock ownership: future earnings and cash flows.

Nike (NKE) has a P/E ratio of around 65, so investors are currently paying 65 times the last 12 months’ earnings per share to buy the stock. If the last 12 months’ earnings per share were to continue indefinitely, it would take 65 years to make your money back. So, initially, Nike looks extremely expensive. Thankfully, the appropriate price of a stock is based on a lot more than current EPS. Let’s conduct a more detailed assessment of Nike’s current earnings and project its future earnings to get a more accurate assessment of Nike’s intrinsic value. Continue reading…

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