Nike: Company Financial Analysis

Executive Summary

Introduction

Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, was considering buying share for the fund she managed, the NorthPoint Large-Cap Fund, with an emphasis on value investing.

Ford held an analysts’ meeting to disclose its fiscal-year 2001 results and most importantly, to communicate a strategy for revitalizing the company. Nike had maintained revenue of about 9 billion since 1997. However, its net income had fallen from almost $800 million to $580 million. Moreover, Nike’s market share in U.S. athletic shoes had fallen from 48% since 1997 to 42% in 2000.

In order to boost revenue, management decided to develop more athletic-shoe products in the midpriced segment which are sold for $70-$90 a pair. As for the cost side to be considered, Nike planned to exert more effort on expense control. The company executives forecasted that their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15%.

In order to decide on an investment decision regarding the mutual fund she managed, Ford decided to develop her own discounted cash flow forecast.

Since Ford was not sure whether to buy stocks, she asked Cohen to estimate Nike’s weighted average cost of capital.

Obviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models.

WACC Approach

WACC is the weighted average return on capital that includes both cost of debt and equity, whereby we discount total cash flows by the appropriate discount rates

By using the Capital Asset Pricing Model (CAPM), Cohen calculated a Weighted Average Cost of Capital (WACC) of 8.4%.

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...is model wouldn’t fit into this case simply because it does not take the growth factor into consideration and therefore, it is considered inconsistent here and should be not used in computing the cost of capital.

The final model used to compute the cost of capital was the earning capitalization model. The problem with this model is that it does not take into consideration the growth of the company. Therefore we chose to reject this calculation. The earnings capitalization model calculations were found this way:

ECM

ECM = E1/Po

216/42.09

5.31%

Recommendation

The sensitivity analysis revealed that Nike was undervalued at a discount rates below 11.17%, when we calculated the WACC our solution was 9.87%. Any estimate below the prescribed discount rate means the stock is undervalued, therefore, it is undervalued and this implies that Nike is a buy stock.