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Nike stock currently appears to be trading at its lowest valuation in 5 to 10 years and hedge fund managers like Bill Aman are taking notice Bill Amman just released his latest form 13f which Reveals All the most recent moves in his portfolio and one of the major moves he made is he increased his Nike position by over 435 and this is now one of the larger positions in his portfolio at about 11.15% now keep in mind he just recently added this to his portfolio not in Q3 of 2024 but in Q2 we can this was a new addition to his portfolio during that time and at that time he only bought around 3 million shares which was around 2% of his portfolio but in this most recent quarter he added more than 13.2 million more shares to his portfolio now Bill Amman has been very successful as a hedge fund manager over the years he's seen great gains from companies like Chipotle and Google so it's definitely worth taking notice when he adds a company like Nike and when he starts adding even more now if we look at the share price performance of Nike over the past year down nearly 29% and look at the past 5 years down 17.61% that is atrocious performance now we can see for a while there it looks like the share price was doing pretty good and it even peaked all the way up to around $170 to $175 per share and it's dropped by over $100 per share down to $76 and66 but here's what's really interesting about this if we jump over to the charting tab here on Seeking Alpha what we're currently looking at is not the share price of Nike over the past 5 years but the price to cash flow ratio it's telling us how much are we willing to pay pay for each dollar of free cash flow that we're receiving as an investor and as of right now the company has a price toh flow ratio of 14.46 so for every $14.46 that I invest into Nike I'm getting $1 back in free cash flow now let's compare that to how the company has historically been valued by investors for example look at 2022 we can see Nike had a price to cash flow ratio ranging of anywhere from the high 30s all the way down to the high 20s significantly higher than their currently value even if we look at the 2020 lows we can see the price to cash flow ratio was sitting at around 21 to 22 so compared to how this company has historically been valued Nike looks drastically undervalued and the same is true even if we look at the past 10 years if we jump over to my stock screener sheet and come up here and plug in ink Nike if we come over here we can see based on trailing 12month free cash flow the company has a starting free cash flow yield of 6.28% and in this case that means for every $100 you invest into the company it's going to produce around $62 since in free cash flow right now and ideally that free cash flow number will be growing over time and then if we jump back over to Seeking Alpha and click on dividends and look at the dividend yield for this company over the past 10 years what we can see is the company now has its highest starting dividend yield in the past decade and the reason behind this is because they've been growing their dividend while the share price has been going down significantly all these are signs that the company could potentially be undervalued at current prices so in this video we're going to start digging into this even more why did Bill Amman make this purchase we're going to talk about the valuation we're going to be looking at the recent earnings report and also looking at the news surrounding the company's recent dividend hike but before we do that I do want to quickly mentioned Seeking Alpha just started their Black Friday sale Seeking Alpha is a tool I've been using for years now and you've likely seen me use it in nearly all the videos that I make and that's because I do use it on a daily basis so I did just want to make you aware if you are interested in Seeking Alpha because of their Black Friday sale you can currently get $9 off as well as a 7-Day free trial so now if we start moving forward and looking at Nike like I said recent news Nike just increased their dividend payout by about 8.1% bumping it up to around 40 cents per share so if we jump over to my dividend breakdown sheet let's go ahead and come up here and plug in NK and hit enter and all this data will load in like always you can by heading over to Ticker dat.com but like I already mentioned the starting dividend yield is now the highest it's been in a decade but one of the things we also have to understand is historically this company's been a very solid dividend growth stock they've increased dividends for I believe2 two consecutive years and have a 10-year dividend kager of close to 10% so we're talking about a long history of growing dividends as we can see right here and growing them at a pretty healthy rate nearly double digits in the past 5 years being at about 8% which is pretty close to being in line with that most recent dividend hike of 8.1% that we just saw so for investors looking for Reliable and growing dividends Nike's been a pretty good pick for them historically speaking over the past couple of decades and they've been able to grow that dividend payment without the payout ratio getting unhealthy we can see a free cash flow payout ratio at as of 2024 sitting at 32.7% still leaving around 78 or 77% of their free cash flow left over to do things like reinvest back into the business pay down debt or even buy back shares and speaking of dividends and buying back shares if we go ahead and jump over to the recent quarters earnings report this was released in early October but if we go ahead and scroll down we can see Nike gives a little bit of space to talk about shareholder returns and we can see in the most recent quarter they paid out around 558 million in dividend payments which is up around 6% from the prior year keep in mind that's the total amount of dividends they paid out was up 6% that's not on a per share basis on a per share basis it'll be even higher because the company is also buying back shares we can see they actually allocate more Capital to buying back shares than paying out dividends Sher purchases was around 1.2 billion reflecting 14.8 million shares retired as part of the company's 4-year 18 billion program approved by the board of directors in June 2022 so if we jump back over to my stock screener we already plugged in Nike earlier we can see the company has has been steadily buying back shares over the past few years for example if you look at where they were in 2022 sitting at about 1.57 billion shares outstanding and at the end of 2024 1.51 so we kind of see a balance with this company between paying out dividends and buying back shares and like I just alluded to buying back shares actually allows them to increase the dividends on a per share basis at an even higher rate so so far we've talked about a lot of the good things about Nike the company looks good from a historical dividend growth perspective they look like they're trading at a good valuation and we're starting to see Confidence from hedge fund manager so what's the reason for the huge selloff well let's start to dig into this earnings report just a little bit more if we go ahead and scroll in we can see first quarter revenues were 11.6 billion this was down 10% on a reported basis compared to the prior year that is a massive reduction in Revenue if we go ahead and jump back over to my stock screener let's jump over and look at this on a quarterly basis we'll come up here and plug in revenue and we can see revenue for that most recent quarter right here came in at about 11.58 billion like we just saw but that's significantly lower than we've seen in recent quarters for example their best quarter ever was in Q2 of 2024 they generated around 13.38 billion so that's a pretty significant decrease and if we look at q1 of 2024 it was about 12.93 billion again another pretty significant reduction now if you've been keeping up with management and the statements they've been putting out they talked about how a 10% reduction in Revenue was actually expected which is one of the big reasons we saw a selloff in 2024 so this poor earnings report was actually expected now if we keep coming down a little bit further we can see on the bright side gross margin increased by about 120 basis points which is a good sign but we can also see diluted earnings per share with 70 cents for the first quarter down 26% so again a massive reduction in diluted earnings per share not a good sign but this was also expected in fact analyst had already priced this in if we jump over to that most recent earnings report they actually saw a beat on the earnings expectations they still saw a slight Miss on Revenue but even with the huge decline in earnings it beat analyst's expectations and pretty significantly as well now if we look at expectations for the upcoming quarters earnings we can see they're going to announce it on December 20th post market and if we look at earnings per share revisions over the last 90 days they have zero bullish revisions and 20 bearish revisions so analysts aren't expecting a good earnings report now let's touch on this gross margin increase that we just mentioned in the earnings report if we jump back over to the stock screener jump over to the profitability tab I've already plugged in Nike and we can see the gross profit ratio for the most part over the past decade has been fairly stable the average is sitting at about 44.76911° had to say about this recent earnings report for example let's look at Jeff one of the biggest pullouts from the report was that Nike has not set a timetable for when it expects to see Positive Growth again so management has said 2025 is going to be a really rough year for this company in fact if we jump back over to Seeking Alpha look at the earnings expectations if we come down here and click on earnings estimates and scroll down we can see right here analyst are expecting close to negative 29% year-over-year growth in 2025 and while they are expecting to start to see Positive Growth start starting in 2026 the management team at Nike hasn't indicated that that will be the case yet and the other difficult news right now is Nike has a lot of exposure to China Nike's greater China segment is roughly 15% of the company's total revenue now at its peak it was about 22% in late 2021 but 33% of operating income so China is a massive portion of the operating income of the revenue that Nike brings in and the reality for Nike right now is the Chinese economy isn't exactly its best and we also could potentially be on the brink of a tariff War so there's plenty of difficulties for Nike right now but there's some bright spots as well but when it comes to valuation we have to ask ourself is all of that downside already priced in as a general principle you don't want to buy a stock that already has its best case scenario priced in you do want to buy a stock that already has its worst case scenario priced in and it looks like that could potentially be the case for Nike but let's dig into this a little bit more now the first thing that I want to do is look at a reverse discounted cash flow analysis and if you're not familiar with this I know it looks complicated but it's actually really not that complicated all we're doing is seeing how is the market valuing Nike and how much free cash flow growth are they pricing into the company so for example if we look at 2024 free cash flow for Nike it came in at about 6.6 billion assuming absolutely no free cash flow growth moving forward 0% free cash flow growth the company would be valued at about $57.99 per share now the current price is $766 so what does this tell us well the market is pricing in free cash flow growth but how much well we can play with this number to find out if we plug in 1% free cash flow growth it jumps up to about 62.3% if we plug in 3% free cash flow growth it jumps all the way up to $726 and then if we plug in 4% free cash FL growth we can see we actually get slightly above the current trading price so what this is telling us is right now the market is pricing in slightly below 4% free cash flow growth for Nike moving forward so the question you have to ask yourself is do you think this is accurate if you think Nike will produce higher growth rates of free cash flow over the next decade then Nike is undervalued and on the flip side if you think free cash flow growth will be slower than this the Nike is overvalued when I look at this free cash flow number yes I understand the next year is going to be difficult for Nike but 4% seems like a pretty low free cash flow growth rate to have priced into the stock I think again this is an argument that the company looks slightly undervalued at these prices if we jump over to my stock valuation sheet and look at some other valuations we'll plug in Nike in Nike's case right now we're not going to use a discounted cash flow because we just used a reverse DCF but if we look at a multiples valuation it's not going to be perfect but it will give us a better idea of a couple of things we can see here two comparables for Nike now we can't use Under Armour because they actually have negative earnings per share which would mess up our valuation in this scenario but we can see the average price to earnings multiple for these comparable companies sitting at about 22.7 s Nike's earnings per share sitting at 3.5 but we can see the average price to earnings multiple for the somewhat comparable company sitting at 22.7 if we appli that same average p eat to Nike we'd come to an intrinsic value of about $80 per share now I think the multiples valuation in the case of Nike is definitely not the best way to Value the company but it does kind of give us an idea of how these comparable companies are valued I think most people would argue Nike typically trades at a premium and we can see we actually get a pretty wide range with price to earnings multiple but it's still interesting to see how they're valued in comparison to Nike now the next valuation we'll look at and the last one is going to be our dividend discount model we're valuing Nike based on how much they pay out in dividends and how much that dividend is increasing over time and we can see in the scenario I'm projecting a dividend growth rate of 6.75% which shouldn't be too difficult for Nike to achieve over the next few years if we look at those historical dividend growth rates it's actually above that the 10 year is at 10% and the 5e at 8% and that most recent dividend hike came in at about 88.1% so I definitely think this is achievable for Nike and when you apply discount rate of 88.5% we come to a dividend discount model price per share of $928 which is around 17 to 18% higher than the current share price for Nike so yes there's a lot going on with Nike there's difficulties in China revenue is declining and there is definitely a lot of negative sentiment around the stock right now and it leads a lot of people to wonder is the brand eroding is their competitive advantages eroding is the company losing their mode but if we look at the stock screener for Nike we can still see return on invested Capital this is usually a decent indicator of whether or not the company has a moat whether or not it's a quality company it's still been pretty good for Nike over the past few years actually it's been really good we can see in 2024 21.57 10% typically you want to see at least 10% now 2020 was the exception obviously that was a difficult year for a lot of retailers and Nike was no exception but for the most part return on invested Capital has been really good for this company and the reality is the brand is still very strong yes they probably lost market share in some areas especially when it comes to running shoe brands but the reality is Nike is still probably viewed as the most favorable sportsare brand look at this we can still see Nike most people know Nike and know them more than their competitors more people like Nike than the competitors more people own Nike than their competitors and more people will purchase Nike again compared to their competitors so there's still signs that this could be a premium company now again like management has warned us this could be a turnaround play that takes time 2025 is going to be a difficult year for this company when it comes to their revenue when it comes to their earnings but there's undoubtedly people betting big on this company with Bill Amman being one of them so go ahead and let me know what you think of Nike in the comments down below if you plan on buying or selling again if you're interested in Seeking Alpha now would be the time to check it out with the 7-Day free trial and the huge discount because of black Friday and like always if you'd like how
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