Down 49% from Highs, Is Nike Stock (NYSE:NKE) a Buy?
Nike (NYSE:NKE) stock is down about 49% from its all-time high. The company is facing some tough times with higher costs and slowing sales growth (see the image below), but it's not sitting back. Analysts expect a good amount of earnings and free cash flow growth over the next few years for Nike, which, at its current prices, makes NKE stock somewhat attractive. Disclosure: We are NOT long NKE stock, but we do see long-term upside potential.
NKE’s revenue over the past 10 years. Source: Finbox
The Obvious Bull Case for NKE
Without getting into long explanations, Nike’s bull case is relatively simple. The company is growing and has a strong brand. I sometimes see long lineups outside of Nike stores that I hardly see anywhere else. People pay up just for a Nike logo.
It’s also a highly profitable company that has grown its EPS and free cash flow pretty consistently over time. Here’s it’s EPS trend below.
Going forward, analysts expect more adjusted EPS growth from NKE in the high-single digit to mid-teens range. See below.
Source: Seeking Alpha
So, Is Nike Stock Undervalued?
Nike stock could be undervalued here. As you can see in the image below, its forward P/E is 23.27x, whereas its average forward P/E for the past five years has been 33.7x. It’s trading at a 5-year low valuation. This means that there’s room for its valuation multiple to expand. However, even if its valuation multiple stays the same, the stock can rise at the same rate as its earnings growth, which could be around 10%.
Source: Tikr.com
Reverse DCF Valuation Says NKE Is Undervalued
Using our reverse DCF calculator, the market is pricing NKE to grow its free cash flow by 7.58% for the next 10 years and then by 3% every year after that. That’s with a 9.5% required rate of return (discount rate), which we took from Finbox. See below. Can NKE achieve this growth? Well, analysts' FCF forecasts state that it can grow its FCF by 11.3% annually for the next 3 years, so it’s possible. Over the past seven years, NKE’s FCF has grown by 11.6% per year.
Now, if your required annual rate of return is 11%, NKE would need to grow FCF by 10.7% every year for the next 10 years, which is also possible. In other words, NKE stock can return 9.5% to 11% per year from here with relative ease.
The Takeaway: NKE Stock Looks Like a Fair Investment
Based on analysts’ forecasts and NKE stock’s relatively low valuation compared to its past, it looks like the stock can return around 10% per year from here or more. That’s as long as NKE keeps up its long-term growth. With its strong brand power, that’s a possibility.
