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As recently as mid-March 2022, Nike (NKE) shares were reasonably valued. Therefore, I acquired 100 additional shares at ~$123/share on March 11. Following this purchase, however, NKE's share price has run-up. I am now of the opinion Nike is slightly overvalued.
I last reviewed NKE in this July 13 2021 post at which time I disclosed that I closed out covered calls at a slight loss; my rationale for writing these covered calls was because I felt NKE was grossly overvalued (refer to my May 28 2021 post). Despite my thoughts on NKE's valuation, NKE became increasingly overvalued until the later stages of 2021.
With the release of Q3 and YTD2022 results following the March 21 market close, I now reanalyze NKE.
Nike - Financials
Q3 and YTD2022 Results
NKE's results released following the March 21 market close are accessible in this Earnings Release.
In 2021, a boycott among Chinese consumers toward Western brands caused NKE’s sales to take a hit. Sales in Greater China, NKE's 3rd-biggest market behind its Europe, Middle East and Africa segment are still in recovery mode with YTD sales having fallen 6% from the prior year (11% excluding currency changes).
Given this, NKE has prioritized North America, its biggest market, over China; YTD sales have risen 12%.
NKE's YTD Gross Profit Margin has improved to 46.3% from the prior YTD result of 44.4%. The shift of business away from wholesalers to selling more goods directly to consumers has led to heavy investment in NKE's website and flagship stores to win sales.
Digital sales in Q3 rose 19% from the prior year, fueled by 33% growth in North America. NKE plans to continue to grow its presence in the digital metaverse, through its tie-up with Roblox as well as its acquisition of the virtual sneaker marker RTFKT.
Demand Creation and Overhead Expenses rose to 31.2% from 28.8%. An explanation for the increase is found in the Earnings Release.
Inventories rose ~$1B, or ~15%, from the February 28, 2021 level. This increase is attributed to elevated in-transit inventories due to extended lead times from ongoing supply chain
disruptions. On the earnings call, management states it has moved up its buying timelines to have enough products on shelves for the Fall of 2022.
NKE's $13.467B of cash and equivalents and short-term investments was up ~$0.939B from February 28, 2021 despite sizable YTD dividend distributions and share repurchases.
Looking at NKE's Balance Sheet, the $13.467B of cash and equivalents and short-term investments could completely clear all current liabilities (~$8.82B) and reduce long-term debt from ~$9.42B to ~$4.77B. Were this to occur, NKE would still have ~$13.5B in current assets with which to completely clear all long-term liabilities. In essence, NKE is a far superior company than the 'basket cases' some investors highly tout.
FY2023 Outlook
NKE reiterated its expectations for FY2022 sales growth in the mid-single-digits from the prior 12-month period. It is, however, holding off on giving its FY2023 outlook until it reports FY2022 results. This delay is due to inflation uncertainties, supply chain issues, and a war in Ukraine.
Credit Ratings
NKE's domestic senior unsecured long-term debt credit ratings remain unchanged from the time of my last review; Moody's assigns an A1 rating while S&P Global assigns an AA- rating.
Moody's rating is the top tier of the 'upper-medium grade' investment-grade category. S&P Global's rating is one notch higher at the bottom tier of the high-grade investment-grade category.
Moody's rating defines NKE as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
S&P's rating defines NKE as having a VERY STRONG capacity to meet its financial commitments with its rating differing from the highest-rated obligors only to a small degree.
NKE recently renegotiated its credit arrangements with its lending syndicate. Page 13 of 179 of the credit agreement stipulates what happens with fees and rates if the ratings assigned by both rating agencies differ.
I view both ratings to be acceptable.
Dividend and Dividend Yield
NKE has increased its dividend payouts for 20 consecutive years. Investors, however, would be wise to focus on an investment's potential overall return and not just a company's potential dividend return. The vast majority of NKE's investment return is most likely to continue to be generated by way of capital gains. Given this, it becomes increasingly important not to overpay to acquire NKE shares.
When I wrote my July 2021 review, NKE's $1.10 annual dividend yielded ~0.68% based on the current ~$162 share price.
NKE's current quarterly dividend is $0.305. Using my recent ~$123 purchase price, the dividend yield is ~1%. With shares having closed at ~$130 before the post-market release of Q3 results on March 21, the dividend yield is ~0.94%. Using the March 21 post-market price of ~$138, the dividend yield drops to ~0.88%.
In Q3 2022, NKE repurchased 8.1 million shares totalling $1.2B. These shares were retired as part of the company's 4 year $15B share repurchase program that was approved by NKE's Board in June 2018. As of February 28, 2022, a total of 68.9 million shares have been repurchased under this program for a total of ~$7.6B.
The weighted average number of outstanding shares in FY2011 - 2021 (in millions rounded) is: 1,943, 1,879, 1,833, 1,812, 1,769, 1,743, 1,692, 1,659, 1,618, 1,592, and 1,609. The diluted weighted average common shares outstanding for the 9 months ending February 28, 2022 is 1615.8.
Valuation
Details of NKE's valuation when I wrote my covered calls in May 2021 and at the time of my July 2021 post are found in my July 13 2021 post.
When I acquired NKE shares at $123/share on March 11, the following were the forward adjusted diluted PE ratios based on broker estimates reflected on the two online trading platforms I use:
- FY2022 - 34 brokers - mean of $3.66 and low/high of $3.42 - $4.01. Using the mean estimate, the forward adjusted diluted PE is ~33.61.
- FY2023 - 34 brokers - mean of $4.66 and low/high of $4.22 - $5.19. Using the mean estimate, the forward adjusted diluted PE is ~26.4.
- FY2024 - 22 brokers - mean of $5.44 and low/high of $4.89 - $5.96. Using the mean estimate, the forward adjusted diluted PE is ~22.6.
Now that NKE has just released Q3 and YTD2022 earnings, the brokers which cover NKE will likely be adjusting their estimates. At the moment, however, the forward adjusted diluted PE levels using the estimates reflected above and March 21 ~$130 share price are:
- FY2022 - 34 brokers - mean of $3.69 and low/high of $3.42 - $4.01. Using the mean estimate, the forward adjusted diluted PE is ~35.
- FY2023 - 34 brokers - mean of $4.64 and low/high of $4.10 - $5.19. Using the mean estimate, the forward adjusted diluted PE is ~28.
- FY2024 - 23 brokers - mean of $5.48 and low/high of $5.10 - $6.00. Using the mean estimate, the forward adjusted diluted PE is ~24.
NKE's share price has jumped to ~$138 after the March 21 market close and release of Q3 and YTD 2022 results. Using this share price and the mean of the current estimates, the adjusted diluted PE levels are:
- FY2022: ~38;
- FY2023: ~30; and
- FY2024: ~25.
NKE's FY2012 - FY2021 diluted PE is 21.86, 26.75, 28.62, 30.34, 22.39, 27.08, 55.74, 35.42, 79.93, and 43.75.
NKE has generated YTD2022 diluted EPS of $2.85. If we estimate NKE will generate $0.95 (one-third of NKE's YTD diluted EPS) in Q4 2022, then FY2022 diluted EPS should come in around $3.80. Using the current $130 share price, the forward diluted PE is ~34.2. If we use the March 21 post-market price of ~$138, the forward diluted PE is ~36.3.
Final Thoughts
In my FFJ Portfolio – February 2022 Report, I disclose my purchase of additional NKE shares in a 'Core' account within the FFJ Portfolio.
NKE was my 25th largest holding when I completed my early January 2022 Investment Holdings Review; it was my 29th largest holding in mid-April 2021 and it was not a top 30 holding in my mid-August 2020 review.
I like NKE's long-term prospects and intend to increase my exposure. Unfortunately, nothing suggests to me that the company's valuation should have increased to the extent it has increased within the past 10 days! Therefore, I will wait for NKE's valuation to retrace to the level (or better) at which I recently acquired shares.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long NKE.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
