Work on the company Nike, use the excel worksheet and build your own dividend discount model. On the Nike company’s financial statement, what you expected to find based on your understanding of the firm’s business, its stability, growth, market and other attributes. Did you believe fundamental value to capture the market value? Why or why not?.
What are the assumptions you made and why? Although you should write about all important assumptions, you need to address the growth, interest rate and horizon assumptions in some details. What is short term and what is long term in your analysis? Why? What are the sources of data you used?.
Consistency across models. Did you make same interest rate and growth assumptions? Why or why not.?.
Nike was founded in the year 1964 and was previously named as Blue Ribbon Sports. The company was founded by Bill Bowerman and Phil Knight. The founder Phil Knight was a runner and he hailed from Portland. He took training for middle distance running from Coach Bill Bowerman. Since then the company has been launching a variety of sports shoes for all types of sports persons. At present Nike has become one of the leading and most profitable brands. It has two subsidiaries: Hurley International and Converse Inc. The success of the company is the result of timely investments and regular innovations (Successstory, 2016).
Nike is one of the leading companies which manufacture sports shoes and apparels. The company’s market share in the year 2013-14 is detailed in the following chart:
Imagesource:
https://www.google.co.in/searchq=nike+market+share&source=lnms&tbm=isch&sa=X&ved=0ahUKEwidzb3s1vfMAhVMro8KHYcrBaIQ_AUIBygB&biw=1024&bih=596#imgrc=8OVDZuYH6wu_jM%3A
From the above pie chart it is clear that the share of the company in comparison to the leading brands is the highest with 40.87% (Statista, 2014). One of the most known brands in the whole world is Nike. A huge share in the market has been captured by the company as depicted in the above pie chart with its slogan “Just Do It”. There are various products like foot wears and apparels that are offered by the company to all the sports persons. The company sells its products through a very well connected network of wholesalers and retailers. It has increased its sales through the online business also in the recent years. The company is operating since almost five decades and is still considered to be the best brand for athletic foot wears and apparels. The company describes itself a growth company when it addresses itself to the investors, which gives a strong message about the intention to continue growing (Bajpai, 2015). There are three most important growth drivers for the company which include growth in three segments i.e. connecting the online stores with the store sale; increasing the growth rate in the emerging markets and growth in the women’s segment. In the year 2015, the company has forecasted to achieve a revenue target of the amount $50 billion. This target is expected to be achieved by the end of the year 2020. The company wishes to achieve this target by focusing on the three growth areas mentioned above. The three growth areas are discussed in detail as under:
Connecting the online stores with the store sale- For improving the experience of the consumers through mobile commerce, the company has added style guides and broadened assortments. The aim of the company is to serve the customers even in the remote locations and increase its market. The company wishes to provide the customers easy access to its products.
Increasing the growth rate in the emerging markets- The most recent and rapidly increasing market for the company is China. If the company focuses on China then it will be able to expand its market share to a great extent. China can serve as an important driver for the growth because of its rapidly increasing passion for sports and also its emerging middle class.
Growth in the women’s segment- The Company is concentrating to generate revenue from the women’s section and to fulfill this aim it has opened stores for only women’s in many places. The company believes that the penetration of this segment is relatively low and the increasing want for a fit and healthy lifestyle can prove to be a huge opportunity for growth (Forbes, 2015).
Fundamental value is important in order to calculate the market value of the company’s stock. This is done by using the data involving finances that is primary for the company. This means that fundamental analysis takes into consideration only those variables which are directly linked to the company, for example, sales, dividends and its earnings. It can therefore be said that fundamental analysis is a very useful technique and can be used either alone or when combined with the other tools and techniques (Investorguide, 2016).
The dividend discount model can be said to be a procedure which helps in the valuation of the price of the shares and stock of a company with the help of the forecasted dividends and then discounting those forecasted dividends to bring them to their present value. If the value of the stock is lower than the value calculated by the dividend discount model then it can be said that the share or the stock of the company is undervalued (investopedia, 2016). The steps for calculating the forecasts are as follows:
Estimating the sales with the help of the assumed sale growth rate
Estimating the Net Operating Assets with the help of assumed ATO (Assets Turn Over ratio)
Estimating the NOPAT (Net Operating Profit After Tax) with the help of assumed PM (Profit Margin)
After that, estimate the FCF (Free Cash Flows) with the help of NOPAT and change in NOA
Estimating the Dividend payouts using dividend payout ratio as assumed.
The forecasts of the Nike Company using for this model are as under:
|
Particulars |
Forecasts |
||||
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
|
1. Forecast sales |
|||||
|
Sales growth rate – estimated |
9% |
9% |
9% |
9% |
9% |
|
Sales |
33231.67 |
36088.50 |
39190.91 |
42560.04 |
46218.79 |
|
2. Forecast ATO and calculate NOA |
|||||
|
forecast ATO |
1.42 |
1.42 |
1.42 |
1.42 |
1.42 |
|
Calculate NOA (NOA=sales/ATO) |
23456.89 |
25473.40 |
27663.27 |
30041.40 |
32623.96 |
|
3. Revise sales forecasts |
|||||
|
4. Forecast PM and calculate NOPAT |
|||||
|
Forecast PM |
11% |
11% |
11% |
11% |
11% |
|
Calculate NOPAT (NOPAT = Sales x PM) |
3554.37 |
3859.93 |
4191.75 |
4552.11 |
4943.44 |
|
5. Forecast any other operating income (unusual items) |
|||||
|
6. Calculate free cash flow (NOPAT – change in NOA) |
|||||
|
change in NOA |
1856.885 |
2016.516 |
2189.870 |
2378.126 |
2582.566 |
|
calculate FCF |
1697.484 |
1843.412 |
2001.884 |
2173.980 |
2360.871 |
|
7. Forecast net dividend payout |
|||||
|
estimated as a % of NOPAT |
28% |
28% |
28% |
28% |
28% |
|
1011 |
1098 |
1192 |
1295 |
1406 |
After the adequate forecasts have been done the dividend discount model will be prepared using the above calculated forecasts. The steps in the preparation of the model are:
Forecasting the net dividend payout by assuming the dividend payout ratio.
After that, estimate the cost of equity of the company which is based on the actual cost of equity.
The next step is to calculate the forecasted dividend growth patterns.
Calculating the Terminal Value using the formula:
Terminal Value = Dividend from next year / cost capital – growth
After that, discount the dividend stream to the year of Terminal Value.
Calculating the total discounted Terminal Value.
There are various assumptions that are taken while calculating the value of stock of the company through the dividend discount model. Those assumptions are:
The growth in sales has been assumed as 9% which is calculated by averaging the growth rates of the last 15 years i.e. from the year 1999 to the year 2014. The sales of the company are forecasted at 9% every year for the fiscal year 2015 to the year 2019.
Further in order to estimate the Net Operating Assets (NOA), the Assets Turnover Ratio of 1.42 has been assumed, which is the ATO as on 2014.
The net profit margin has been assumed to be at the rate of 11%, which was the rate of profit margin for the year 2014 and the same rate is taken for all the years.
The dividend payout ratio is 28% for the year 2014 and it has been assumed that the same will continue for the forecasted years as well.
The Dividend discount model with constant growth for the Nike Company is as under:
|
Discounted Dividend Model (in $) |
||||||
|
Particulars |
Actual |
Forecasts |
||||
|
Year |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
|
1 |
2 |
3 |
4 |
5 |
||
|
1. Forecast net dividend payout |
931 |
1011 |
1098 |
1192 |
1295 |
1406 |
|
2. Estimate cost of capital for equity |
26% |
1.26 |
1.58 |
1.99 |
2.50 |
3.15 |
|
3. Calculate forecast dividend growth patterns |
9% |
9% |
9% |
9% |
||
|
estimate TV method |
||||||
|
4. Calculate TV (div from next year / cost capital – growth) |
3925.13 |
49584.80 |
4629.01 |
5026.96 |
5459.12 |
|
|
5. Discount dividend stream to TV year |
804 |
694 |
600 |
518 |
447 |
|
|
Discount TV |
The dividend payouts by the company as forecasted in the above table have been discounted using the discounted rate as 26% and the growth rate taken is 9%. The growth rate is constant in all the forecasted years. The Terminal value used in the model is calculated using the following formula: |
39429 |
2927 |
2528 |
2183 |
0 |
|
Total value = |
50129 |
Applying the above model on the dividend payouts which are forecasted, the net value of Nike as on 2014 is $ 50129 Billion. It is to be mentioned that all the figures that are given in the above table are on the long term basis and the forecasts are also done taking all the figures to be on the long term basis.
The data is taken from the following sources:
Morning Star (Morningstar, 2016)
Annual Report
Stock Analysis on Net (Stock-analysis-on.net, 2016).
Conclusion
Nike is said to be one of the leading companies across the world and is the most recognized brand. The financial position of the company is very strong and on the basis of the dividend discount model the value of the company is approximately $50 billion.
References
Bajpai, P., 2015. Nike, Inc. Is A Growth Company (NKE). [Online] Available at: https://www.investopedia.com/stock-analysis/081815/nike-inc-growth-company-nke.aspx [Accessed 26 May 2016].
Forbes, 2015. Here Are The Three Key Growth Drivers For Nike. [Online] Available at: https://www.forbes.com/sites/greatspeculations/2015/11/24/here-are-the-three-key-growth-drivers-for-nike/#125a42943dcb [Accessed 26 May 2016].
Investopedia, 2016. Dividend Discount Model – DDM. [Online] Available at: https://www.investopedia.com/terms/d/ddm.asp [Accessed 26 May 2016].
Investorguide, 2016. Using Stock Fundamental Analysis to Value a Company. [Online] Available at: https://www.investorguide.com/article/11632/valuation-methods-used-in-fundamental-analysis-of-stocks-igu/?gcs=1 [Accessed 26 May 2016].
Morningstar, 2016. Nike Inc. [Online] Available at: https://financials.morningstar.com/ratios/r.html?t=NKE [Accessed 26 May 2016].
Statista, 2014. Sportswear / Sporting goods companies ranked by worldwide revenue in 2014 (in billion U.S. dollars). [Online] Available at: https://www.statista.com/statistics/241885/sporting-goods–sportswear-companies-revenue-worldwide/ [Accessed 26 May 2016].
Stock-analysis-on.net, 2016. Nike Inc. (NKE). [Online] Available at: https://www.stock-analysis-on.net/NYSE/Company/Nike-Inc [Accessed 26 May 2016].
Successstory, 2016. Nike, Inc. Success Story. [Online] Available at: https://successstory.com/companies/nike-inc [Accessed 26 May 2016].
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