ozgurdonmaz Introduction Nike (NYSE:NKE) is a sports and leisurewear company that will be immediately familiar to readers, due to the ubiquity of its products across the globe. Today, I will argue, the stock is currently offering investors a once in a multiyear entry point. The stock has struggled over the last number of years as a weakening macroeconomic backdrop, particularly in China, has left investors wondering what the future growth prospects are for the firm. In addition, the firm has misfired on its product innovation roadmap, which has allowed competitors to pick up market share in areas such as running. In its fiscal Q4 earnings released last week, the firm highlighted continued challenges for its business, which are now expected to continue its fiscal 2025. The market reaction to the news was nothing short of spectacular, sending shares down by just under 20% on the day. I believe the sell-off provides investors with an incredibly attractive entry point into the leading global sports brand. I recommend a buy given the combination of attractive medium term growth forecast, cheap valuation and by far the most recognized and valuable global sports brand. Earnings Nike released its fiscal Q4 earnings after the bell on Thursday. Q4 revenue was flat year-on-year on a constant currency basis. Looking under the hood, the firm saw some signs of improvement in China where revenue grew by 8%, albeit from a lowered base. However, revenue in both North America and EMEA were very weak. On the back of these results management decided to lower their guidance for fiscal 2025, they are now expecting a high single digit decline in revenue having previously guided for low single digit declines. CEO John Donahoe acknowledged that a lack of product innovation had hurt the company and allowed some competitors to steal some market share in categories like running shoes. While this admission may have struck some investors as stark, I respect management’s honesty as I think it shows their willingness to have open discourse with investors. Nike is now taking action to address the innovation shortcomings, with a goal to double the innovation pipeline by the end of 2025. Given the history, scale and financial resources of the firm, I think investors can be confident management will right the ship. ” And as we kicked off our multi-year innovation cycle, one of our key priorities has been increasing our speed to the consumer. We believe accelerating the pace and consistency of our innovation will allow us to deliver impact at scale, season after season”. (CEO John Donahoe) More positively, management raised the full year dividend by 8% and on a per-share basis dividends were closer to +10%. Per-share numbers continue to be lifted by a share buyback program, with $4.3B spent on buybacks in fiscal 2024. EPS for fiscal 2024 was higher by 15%, which highlights the firm’s ability to manage costs in a challenged revenue environment. In addition, the firm retains a clean balance sheet with a trivial net debt of just $370m. Balance sheet flexibility provides management with scope to pursue tactical M&A should they see fit. Valuation Following a sharp sell-off during Friday’s market session, I think Nike is now trading at a very attractive entry point from a valuation perspective. The stock now trades a full standard deviation below its ten-year mean P/E. This fall in valuation is important for our expected future return, as studies have confirmed that a lower starting point of valuation tends to be equated with higher forward ten-year total returns. The logic is of course simple, valuation over time tends to exhibit a mean reverting property. As a result, a low starting valuation gives us upside room for the valuation to mean revert upwards and lift the stock value along with it. Koyfin A part of valuation that is less cut and dry, is attributing intangible value to a firm’s brand. It is impossible to accurately attribute a dollar value but estimates can be made. According to Interbrand, Nike has the ninth most valuable brand in the world with an attributed brand value of close to $54B. Nike’s brand value far exceeds that of its nearest sportswear peer adidas (OTCQX:ADDYY), which is ranked as the 42nd largest brand for a value of $16.5B. Hence, Nike has a brand value more than 3x that of its nearest peer. The strength of Nike’s brand is a core part of my thesis, that when the macrocycle recovers, Nike will be well-placed to continue to grow with its global leading sports franchise. I believe the market is currently gifting us an unusually good entry point into a top ten global brand. British investor Terry Smith has a useful rule of thumb for valuation and forecasting long-term returns of a stock. His simple formula is to take the FCF yield and add it to the medium term expected EPS growth. This figure will likely be close to the return of the stock in the long run. Looking at Nike, we see a current FCF yield of 4.4% and a medium term EPS forecast of 8.5%. I believe the combination of a leading brand, attractive valuation and robust expected growth make Nike a stock to buy at this moment. Koyfin Risks The obvious risk to my Nike thesis is a significantly longer recovery time for the global macrocycle. Forecasting macroeconomics is inherently difficult but we do know the economy is cyclical and it will fluctuate through time. I believe that a weak point in the cycle like the present can present compelling opportunities for the long-term investor in businesses, as short-term pessimism creates mispricing in high quality securities. Additionally, the firm faces the risk of mis-execution in rebuilding its innovation pipeline. If the firm fails to get the product roadmap back into a healthy condition, then it is likely that competitors will continue to gain market share. Indeed, the firm has faced multiple downgrades by Wall Street analysts following Q4 earnings. My thesis is Nike grew to be the world’s leading brand for a reason. The firm has a long history of developing great products, I see the current product mishaps as a bump in the road rather than a fundamental change. Conclusion I believe the recent sell-off in Nike’s stock has been an extreme reaction to near-term weakness in the macrocycle. The sell-off has presented us as investors with an unusually attractive entry point into a global leading brand. With the expectation of an improving macrocycle in time, it is reasonable to expect valuations to rebound from the current depressed levels. In addition, the firm boasts an attractive FCF yield and medium term EPS growth forecast, which supports an expectation of solid long-term growth for the stock from here. I think peak pessimism has arrived for the stock and I recommend investors to buy the stock as it trades at a significant discount to its historical average. The stock is offering us a rare opportunity to buy a global leading brand at a steep discount to its normal valuation. The stock may continue to face challenges in the near term given sentiment remains extremely low, but I believe the long-term investor will be rewarded by purchasing at an attractive valuation and being patient. As Ben Graham famously said, the market is a voting machine in the short term but a weighing machine in the long term. Nike is a tremendous brand with global reach and I expect that to be reflected in the long term.
sekar nallalu Cryptocurrency,NKE,Perseus Perspectives Nike: Peak Pessimism Creates A Buying Opportunity (NYSE:NKE)