Nike Initiating Coverage Report

INITIATING COVERAGE REPORT

Temple University Investment Association The Fox Fund November 10th, 2016

Tyler McMahon: Lead Analyst [email protected] Andrew Cutrona: Lead Analyst

[email protected] Kevin Vo: Associate Analyst [email protected] Amine Aouom: Associate Analyst

[email protected]

COMPANY OVERVIEW

Nike Inc. is an apparel and footwear company that conducts

operations in the design, development, marketing, and sale of

sports and lifestyle footwear (61% of FY 2016 revenue),

apparel (28% of FY 2016 revenue), equipment (5% of FY 2016

revenue), and accessories and services (6% of FY 2016

revenue). Nike markets product designed for athletic and

recreational uses. The company’s athletic footwear products are

designed primarily for specific athletic use, although a large

percentage of the products are worn for casual or leisure

purposes. The company wholly-owned subsidiaries include

Converse Inc., and Hurley International LLC. Nike’s business

has been primarily concentrated in the United States, which

accounted for 42% of the company’s total sales in FY 2016.

The company also derived FY 2015 revenue from China

(10.8%), Germany (3.8%), Canada, (3.6%), United Kingdom

(3.3%), France (2.8%), Japan (2.7%) and in other locations

(31%). NKE reports Q2 2017 earnings on December 27, 2016.

INVESTMENT THESIS

Nike Inc. is currently trading at 19.1% discount to its average

three-year forward P/E multiple of 20.33x, and a 10.5%

discount to its average three-year forward EV/EBITDA

multiple of 15.42x. Despite significant growth in revenues and

earnings, investors began devaluing Nike when it missed

analysts’ quarterly estimates at the end of Q3 2016, due to (1)

the economic slowdown in China in 2015 and early 2016, and

(2) the emerging competition from Under Armour and Adidas

in the North America segment. Nike is recognized as one of

the most well-known and valuable apparel brands around the

world. Nike reported higher sales and revenue growth in the

Greater China segment, in part from the country’s growing

middle class, its role in the 2008 Summer Olympics and the

upcoming 2022 Olympics, and rising demand for the Nike

brand footwear and apparel. Through Nike’s direct-to-

consumer channels, it will provide more online and retail

services to consumers in all geographical segments, which

consists 24.3% of total revenue in FY 2016. Looking forward,

Nike’s strong revenue and EPS growth, additional store

openings, international brand recognition, and rising market

share in China will generate more revenue growth and higher

dividend returns for its investors in the next two years. Nike’s

target share price is expected to reach $57.38, yielding a 13.2%

return.

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Nike Inc. Exchange: NYSE Ticker: NKE Target Price: $57.38

Sector Outperform Recommendation: BUY

Key Statistics: values in mm except per share

Price $50.69 52 Week Low $49.80

Return 13.2% 52 Week High $68.20

Shares O/S 1.665 Yield 1.25%

Market Cap $85.06 Enterprise Value $81.67

One-Year Price Graph

Earnings/Revenue Surprise History:

Quarters EPS Revenue Δ Price

2Q16 5.20% (1.60)% (2.38)%

3Q16 13.4% (2.10)% (3.79)%

4Q16 2.30% (0.30)% 3.84%

1Q17 30.7% 2.20% (3.78)%

Earnings Projections:

Fiscal Year

Q1 Q2 Q3 Q4 Total

2015 $0.55 $0.37 $0.45 $0.49 $1.86

2016 $0.67 $0.45 $0.55 $0.49 $2.16

2017 $0.73 $0.43e $0.61e $0.59e $2.37

2018e $0.74 $0.55 $0.72 $0.69 $2.70

All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via FactSet, Bloomberg and other vendors. The Fox Fund fund does and seeks to do business with companies covered in its research reports.

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SEGMENTS OVERVIEW

Geographic Segments

North America Market

Nike Brand & Converse sales in the United States accounted for approximately 45% in its 2015 and 2014 fiscal years. Nike Brand, Jordan Brand, Hurley and converse products are sold in thousands of retailers around the country. Products are found in various footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. Nike has 185 Nike Brand factory stores, 33 Nike Brand in-line stores, 92 Converse stores, and 29 Hurley stores operating within the United States.

International Market

For both fiscal 2015 and fiscal 2014, non-U.S. NIKE Brand and Converse sales accounted for 54% of total revenues. Nike sells its products to retail accounts, through its own Direct to consumer operations as well as through a mix of independent distributors, licensees and sales representatives around the world. Nike sells to thousands of retail accounts and ships products to 45 distribution centers outside the United States. Nike has 512 Nike Brand factory stores, 73 Nike Brand in-line stores, and seven Converse stores operating internationally.

Product Segments Footwear

Nike’s athletic footwear products are designed primarily for specific athletic use, although a large percentage of the products are worn for casual or leisure purposes. Nike focuses on innovation and high-quality construction for all of their products. Sportswear, running, the Jordan Brand and soccer are currently Nike’s best-selling footwear categories.

Apparel

Nike sells apparel covering the above-mentioned categories, which are sold predominantly through the same marketing and distribution channels as athletic footwear. Footwear, apparel and accessories are often marketed in “collections” of similar use or by category. Nike apparel is also marketed with licensed college and professional team and league logos. Nike’s sports apparel, similar to our athletic footwear products, are designed primarily for athletic use and exemplifies the company's commitment to create innovative and high-quality products. Sportswear, men’s training, running, soccer and women’s training are currently Nike’s top-selling apparel categories.

Equipment

Nike sells a line of performance equipment and accessories under the NIKE Brand name, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs and other equipment designed for sports activities. The company also sell small amounts of various plastic products to other manufacturers through our wholly-owned subsidiary, NIKE IHM, Inc.

Other

The Jordan Brand designs, distributes and licenses athletic and casual footwear, apparel and accessories predominantly focused on basketball using the Jumpman trademark. Hurley, a subsidiary of Nike, designs and distributes a line of action sports and youth lifestyle apparel and accessories under the Hurley trademark. Sales and operating results for Hurley are included within the Nike Brand Action Sports category and within the North America geographic operating segment. Another of Nike wholly-owned subsidiary brands, Converse, designs, distributes and licenses casual sneakers, apparel and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell trademarks.

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INDUSTRY OVERVIEW

Footwear Market

The global footwear market has seen diversified trends across different geographic regions such as North America, Europe, Asia Pacific, and Rest of the World. The global footwear market is driven by factors such as growing demand for new design of footwear and growing awareness about healthy and active lifestyle. Increasing population, propensity of people to spend more and emerging retail outlets have also attributed to the growing demand for footwear across the global market. Also, there are certain restraints which are slowing down the growth of the global footwear market. Increasing environmental concerns and rising prices of raw material are the main factors which are acting as restraints for the global footwear market. The footwear market has been divided into three segments: by types of footwear, by consumer group, and by geography. Further, the by types of footwear include athletic footwear and non-athletic footwear. The report also offers competitive analysis about sub-segment of athletic footwear and non-athletic footwear. Athletic footwear segment offers products of four categories which include insert shoes, sports shoes, hiking shoes and backpacking boots. Sports shoes are expected to have the largest market in terms of volume globally from 2014 to 2020. Industry/Consumer Trends

Consumer group, which includes men, women, and kids. The men's footwear market accounts for maximum market share followed by women and kids. In terms of value, North America is expected to have the largest market share for consumer group footwear market from 2014 to 2020. Globally, Asia Pacific accounts for the maximum share for consumer group footwear market in terms of volume during the forecast period. This market research study analyzes the global footwear market and provides estimates in terms of revenue (USD Million) and volume (Million Units) from 2014 to 2023. It recognizes the drivers and restraints affecting the industry and analyzes their impact over the forecast period from 2015 to 2023. Moreover, it identifies the significant opportunities for market growth in the years to come.

MOATS Pricing Power: As the leading player in the $320 billion global athletic footwear, apparel, and equipment market (according to NPD Group estimates), we believe Nike has developed a wide moat via its superior product-development capabilities, universally recognized brands, and economies of scale. Nike's global brand reach, including a strong presence in emerging markets, is the result of core research and development capabilities and a marketing budget of more than $3 billion (including endorsements from some of the most popular global athletes). As a result, consumers have shown a propensity to pay premium prices for Nike's products. With leading market share in a variety of categories including sportswear ($6.6 billion), running ($4.9 billion), basketball ($3.7 billion), and athletic training ($3.8 billion in annual sales), Nike can exert a significant amount of influence over retailers, many of whom rely on its products to drive customer traffic. Rights & Endorsements: Nike is a company driven to provide innovative and quality products for athletes all over the world. Its powerful brand puts them in position to have rights with and endorsement deals with the biggest names in sports. Nike has renewed its massive NFL on-field apparel rights contract, adding three years to the five-year deal that took effect in 2012. The on the field rights extension also blocks competitors like Under Armour from the valuable partnership until 2019. Nike also has endorsements deals with some of the largest athletes in sports that include Lebron James, Kevin Durant, Cristiano Ronaldo and Rodger Federer. Their ability to have endorsements with players in all different sports gives their brand exposure in all athletics. This influential marketing strategy will continue to build Nike’s brand as well as increase sales for all of their products. RISKS Economic Trends: Nike's intrinsic value can be influenced by global economic trends, including discretionary spending patterns and exchange rates. Industry competition, particularly from Under Armour, Adidas, and Puma is always present and could also come from new entrants in developing-market economies such as China. Changes in consumer tastes and preferences are always a risk in athletic footwear and apparel categories, and despite performance attributes, products do have a strong element of fashion. As sportswear and women's segments grow faster than core sports apparel, sports footwear and equipment, we believe there could be greater volatility and fashion risk. With more than half of its sales coming from outside the U.S. and a heavy concentration of Asia-based suppliers, the firm does face the risk of increased import costs and currency volatility, which cannot be hedged indefinitely.

Future Growth: Nike has experienced strong growth in its home market as the brand's popularity has been ever increasing in recent years. We note that some athletic segments, such as basketball where Nike is dominant, tend to be somewhat cyclical with fashion trends and investors should be wary of extrapolating trends too far into the future. Other categories, such as running, have a more functional component and brand loyalty as runners are wary of switching brands for fear of injury. Currently, Nike appears to be gaining from an increase in sports participation globally. Although the company has always succeeded with a wholesale-dominated strategy, recent gains and increasing management emphasis on direct-to-consumer channels pose execution risks. Retail channels require greater investment and higher overhead; profits also tend to be more cyclical with the economy. In the near term, direct-to-consumer sales could increase growth and profitability, but investors run the risk that such investments could dilute returns in the longer term.

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CATALYSTS Direct-to-Consumer Sales Nike’s (NKE) DTC (direct to consumer) channel includes sales made online on Nike.com and through its own retail stores. Nike’s direct to consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers. At the end of FY 2015, Nike had about 931 retail locations, in which it expanded its store count by 73 in FY 2015. At the end of FY 2016, Nike had about 1045 retail locations, expanding its store count by 114 in its most recent FY. In contrast, Adidas (ADDYY) closed a net total of 191 stores in 2015. While wholesale revenues remain the largest component of overall NIKE Brand revenues, Nike continues to expand its DTC businesses in each of its geographies. Nike's direct-to-consumer business helps cut out the middleman that would normally pocket a percentage of sales. Through e-commerce, Nike can eliminate much of the fixed cost associated with physical stores while also increasing its ability to up-sell products. For instance, the company's NikeID service allows customers to create custom shoes with their own designs and colors, for a fee of course. The contribution from the DTC channel has been rising steadily over the past few quarters for Nike. For FY 2016, DTC revenues represented approximately 26% of total NIKE Brand revenues, up from 20% in FY 2014 and 23% in FY 2015. It is likely to make up even more of the top line in the future as the company continues to invest in digital infrastructure and increase its number of owned stores. On a currency-neutral basis, DTC revenues increased 25% for FY 2016, driven by strong online sales growth, the addition of new stores and comparable store sales growth of 10%. While total sales rose 8%, Nike.com sales increased a full 49% YoY. This follows a 46% rise between FY 2015 and 2016. In FY 2016, online sales represented approximately 22% of total NIKE Brand DTC revenues. In 2015, Nike outlined a goal of reaching $50 billion in revenue by 2020, an increase on the top line of $20 billion from $30.6 billion in FY 2015. Half of that growth is expected to come from the direct-to-consumer (DTC) channel, which includes Nike's own stores and e-commerce as it expects DTC to grow from $6.6 billion in FY 2015 to $16 billion in FY 2020. In other words, the burden on futures orders or wholesale to deliver growth will be significantly less than it has been in the past. E-commerce will be a key driver of that growth. Nike expects E-commerce revenue to reach $7 billion by FY 2020. The surge in online sales comes not only from the growing trend toward online shopping, but also from some key investments Nike has made. A few such investments include creating seamless ways to shop both in Nike stores and online by having tablets in store to order anything not in stock at that time. Another investment has been building out a series of mobile apps that connect with consumers more personally and to allow them to make purchases easily from their smartphone. The next generation of Nike's mobile shopping plan was recently launched called Nike+. Nike+ is a mobile app that allows users to track workouts, contact Nike support, see trending news, and utilize the in-app shopping feature, which makes recommendations based on the user's activities and habits. The gross margin Nike enjoys on its direct-to-consumer sales is higher than when its items are sold wholesale, Nike gets to charge a higher selling price for online customized NikeID gear without much change in material or manufacturing, and Nike is expanding internationally by building out more robust online sales channels and doubled its number of local online storefronts in specific countries from 20 to 40. All of these initiatives will continue to grow Nike's online sales which will directly benefit the company's bottom line.

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China Emerging Market

Nike is a leader in the sportswear industry and its brand visibility is growing immensely in China as fitness is becoming a staple in Chinese daily life. In June, China’s State Council approved a National Fitness Plan which sets ambitious targets to improve national fitness, increase sports participation and encourage people to incorporate regular physical activities into their weekly routines. The government will invest in the construction of new public sports facilities such as fitness centers, sports venues and stadiums, and implement fitness and sports activities programs. Assuming, rather conservatively, that China's fitness industry grows in line with the country's GDP, it is likely to be worth more than $200 billion by 2020. Currently, China accounts for $3,785 million dollars in sales (11.7% of total sales) which is 32% of all international sales. Sportswear, basketball and Jordan have all been driving revenues for Nike in China. As it stands, footwear is Nike's leading revenue contributor in China but apparel could reduce the gap with the rise of the Chinese fitness industry. Since FY 2014 Nike’s sales in China have from $2.602 billion to $3.785 billion, a 45.5% increase over two years. This will boost demand for Nike's athletic merchandise immensely. Analysts believe global name brands such as Nike who endorse big name athletes are dominant players for accelerated growth as China brands have yet to successfully penetrate the market. Nike endorses iconic athletes and sports teams around the world such as LeBron James, Christiano Ronaldo, FC Barcelona, etc. contributes heavily to their commitment to innovative products and continued sales growth around the world. Nike’s sales in China are projected to rise to $4,967 billion in FY 2018, a 29% increase from sales in 2016. We believe this is a conservative estimate as China has a growing middle class of nearly 220 million citizens compared the United States 121 million. Due to Nike’s strong brand reputation and awareness, we believe Nike has an extreme growth opportunity in China as it is the global leader in sports footwear, apparel and equipment internationally. Nike will continue to have great international growth as it isn't a business that merely sells apparel or athletic footwear, it thrives by selling its brand.

Seasonal Revenue Headwinds Retail industries benefit particularly well from the Thanksgiving to New Year’s period. Retailers do 20 to 30 percent of the year’s business during the holiday season. Nike has seen superb growth after the holidays in Q3 (November to February) as it reported earnings growth of 17.1% YoY growth from FY 2014 to FY 2015 and 23.6% YoY growth from FY 2015 to FY 2016. Holiday spending is expected to increase 10% compared to the 2015 holiday season which is its highest point since the Great Recession. Consumer purchases climbed 0.5% in September, the most in three months as incomes grew, signaling momentum in the biggest part of the U.S. economy. We believe this trend will continue into the holidays as consumer will spend an average of $935.58 during the holiday season. The increase in spending will certainly help boost retail sales especially for a leading footwear and apparel retailer like Nike.

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FINANCIALS

Revenue

Nike derives its revenue from five segments: Footwear (61.4% of FY 2016 revenue), Apparel (28.0%), Equipment (4.5%), Global Brand Divisions (0.2%), and Converse (6.0%). Since FY 2013, total revenue has grown from $25.3 billion to $32.4 billion, illustrating an 8.5% CAGR. Sales from its Footwear segment increased by 8.5% YoY, accounting 51.1% ($3.6 billion) of all revenue growth since 2013. Every geographical segments are expected to generate higher sales for FY 2016, in part from its direct-to-consumer channels consisting 22.4% of total revenue. Due to high demands for the company’s brand products, its strong initiative for innovation will develop further brand connections and compelling retail experiences to consumers online and across NIKE-owned and retail partner stores. International success is a key factor to Nike’s growth as every international region achieved double-digit growth in sales on a currency neutral basis. Going forward, Nike will increase its revenue at 8.31% CAGR from $32.4 billion to $37.9 billion in FY 2018, driven by innovation and strong growth in brand product lines. North America (45.5% of FY 2016 Revenue) The North America segment increased its revenue from $11.2 billion to $14.8 billion from FY 2013 to FY 2016, at a CAGR of 9.7%. Sales of footwear accounted 63.0% of total revenue in FY 2016, which grew 9.3% YoY from $8.5 billion in FY 2015 to $9.3 billion. The company’s strength in footwear sales, due to higher demand and preferences for the Jordan Brand footwear, have generated higher revenue growth in this segment. With the emergence of direct-to-consumer channels through online shopping and retail stores, Nike has the advantage to drive up sales in the domestic market. Europe (22.6% of FY 2016 Revenue) The Europe segment reported revenue of $7.31 billion at the end of FY 2016, an increase of 34.9% from $5.42 million in FY 2013 (10.5% CAGR). Revenues in Western Europe increased by 14% with double-digit growth in every territory, leading the pack by UK & Ireland, and AGS (Austria, Germany and Switzerland), with growth rates of 12% and 16% respectively. Sales from DTC grew 28% for FY 2016, due to the strength of online sales growth, the addition of new stores, and the growth of comparable store sales at 13% within this segment. Greater China / Japan (14.4% of FY 2016 Revenue) Revenue from the Greater China and Japan segment have grown at a CAGR of 4.5%, from $3.35 billion in FY 2013 to $3.82 billion in FY 2016. Sales in China attributed all of revenue growth with $1.3 billion, offsetting losses of $7 million from the Japanese market since 2013. China’s massive market size, with the growth of the country’s middle class and rising popularity of basketball, will provide the advantage to boost demand for Nike’s products. With the company’s market share over 10% in China, Nike is expected to drive higher revenues and sales in this segment. Emerging Markets (11.4% of FY 2016 Revenue) Revenue from the Emerging Markets segment fell from $3.8 billion in FY 2013 to $3.7 billion, the only geographical segment to report revenue losses.

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Margins

From FY 2014 to FY 2016 gross margin has expanded from 44.8% to 46.2%, operating margin has expanded from 13.2% to 13.9% and profit margin has expanded from 9.7% to 11.6%. NIKE, Inc. gross margin expanded 20 basis points between FY 2015 and FY 2016. Gross margin increased primarily due to higher full-price average selling price and the favorable impact of growth their higher-margin direct to consumer (DTC) businesses. However gross margin expansion was partially offset by higher product costs, primarily due to shifts in mix to higher-cost products and labor input cost inflation, higher off-price mix and unfavorable changes in foreign currency exchange rates. NIKE Brand product’s higher full-price average selling price (ASP) increased gross margin approximately 190 basis points in FY 2016 due to innovative premium products with higher prices and, to a lesser extent, inflationary price increases. Growth in Nike’s higher-margin direct to consumer (DTC) business increased gross margin approximately 20 basis points in FY 2016. Higher NIKE Brand product costs decreased gross margin approximately 70 basis points in FY 2016 due to a shift in their product mix to higher-cost products and input labor cost inflation which was only slightly offset by lower input material costs. Clearing excess inventory in North America through off-price products decreased gross margin approximately 30 basis points in FY 2016. Unfavorable changes in foreign currency exchange rates decreased gross margin approximately 40 basis points in FY 2016. Higher product design and development costs decreased gross margin approximately 20 basis points in FY 2016. Converse’s shift to a lower-margin product mix decreased gross margin approximately 20 basis points in FY 2016. In FY 2015, Nike’s gross margin expanded 120 basis points over FY 2014. Nike’s gross margin benefited from delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value proposition for consumers. Nike has been steadily changing its sales mix toward higher priced products which has helped to increase sales revenue faster than sales volume. For example, in FY 2015 Nike increased footwear unit sales 9% while growing revenue 13% and 17% excluding foreign currency fluctuations, showing the effect of Nike's pricing power in footwear. The company forecasts re aching $50 billion in annual sales by 2020. At its current profit margin, that would mean net income of $5.81 billion, a 35% increase over fiscal year 2016. From the premium pricing to efficiency gains and cost management, Nike is likely to see its profit margin increase even further as net income continues to increase. Currency exchange rate fluctuations and excess inventories or inventory shortages could result in lower revenues and higher costs which could hinder future margin expansion.

Earnings

CVS Health has missed earning in Q1 and Q2 on FY 2016. Although the official earnings numbers reflected a decrease from the prior-year-periods, the news was not surprising or that concerning. The negative comparisons stemmed from the costs related to the acquisitions of Omnicare and Target’s in-store pharmacies and clinics that took place in December of 2015. As mentioned before, besides paying $542 million of debt and $114 million in interest expense during Q2 of FY 2016 compared to Q2 of FY 2015, the company reported $81 million more in integration costs related to these acquisitions. On a positive note, non-GAAP earnings per share grew from $1.32 from $1.22 in the prior year period, which exceeded investors’ expectations. Prior to Q1 & Q2 of FY 2016, CVS Health has surpassed earnings expectations 17 out of last 18 periods with an average earnings surprise of 15.92%. Our sector has forecasted EPS of $5.08 in FY 2016 (9.7% YoY growth) and $6.18 in FY 2017 (21.7% YoY growth). CVS Health has shown the ability to consistently grow earnings and we are very bullish that the company will continue to do so going forward as it continues to expand and see success in both of its segments.

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Free Cash Flow Nike expects to grow its Free Cash Flow, or FCF, at a faster pace compared to net income over the next five years through fiscal 2020. In fiscal 2015, FCF grew by ~74%, compared to the 21.5% growth in net income. The growth in FCF has been supported by Nike’s expanding margins, and a slight fall in capital expenditure relative to sales.

Shareholder Return

Nike currently has a dividend yield of 1.27%. The company paid $266.4 million of cash dividends as of Q3 2016, with quarterly payments of $.16 per share spanning back to the first quarter of 2016. As of November 19, 2015, the company approved a four-year repurchase program of shares worth $12 billion, in addition to a 2-for-1 stock split for class A and class B shares. Since the stock split will not have any effect on the company’s equity, the repurchasing of shares signifies the increase in value of remaining shares, thus boosting the potential of higher returns for investors and shareholders.

Debt

As of May 31, 2016, Nike has a total debt outstanding of $9.14 billion, an increase of 2.8% YoY from $8.89 billion in FY 2015. The change in Nike’s total debt illustrates the rise of long-term debt as the company sold more 10- and 30-year corporate bonds, thus increasing from $1.08 billion in FY 2015 to $2.01 billion. Short-term debt, on the other hand, eventually decreased from $6.33 billion in FY 2015 to $5.36 billion. Nike has debt principle payments of $500, $1000, $500, $1000, and $500 million due in 2023, 2026, 2043, 2045, and 2046 respectively. The company also has a $2 billion revolver expiring in 2020. Overall, its Debt to Equity (D/E) ratio holds at 74.5% as of FY 2016, along with the S&P credit rating of AA-, well above investment grade.

VALUATION

Peer Group Analysis

The competitor gaining the most ground as of 2015 is Under Armour. The company is actively pursuing lucrative U.S. sponsorship deals similar to Nike’s, giving it a growing piece of market revenue. In Europe, Adidas is developing new products to compete head to head with the giant. Chinese companies Anta and Li Ning show a steady increase in sales within China. Nike's goal is to grow its annual revenues to $50 billion by 2020. It intends to accomplish this by significantly increasing its direct sales and e-commerce revenues in developed markets. The company also sees significant growth opportunities in China and in its women-focused product lines.

Adidas expects to grow its top-line revenue by 15% annually through 2020. It plans to create this growth through investments to increase its speed of new products to market, which will allow the company to adapt more quickly. It also intends to invest strategically in marketing in growing urban cities across the globe, as the company recognizes the movement of population, particularly younger and more athletic segments of the population, to urban areas. The company boasts a market capitalization approaching $19 billion and trailing 12-month revenues over $16 billion. The stock ended 2015 priced around $48 per share and with a price-to-earnings (P/E) ratio just over 8. The stock ended 2015 near its 52-week high, which was approximately $50 per share. It also yields a dividend around 1.8%.

Under Armour has a market capitalization around $15.5 billion and trailing 12-month revenues of $3.6 billion. The stock ended 2015 trading around $80 per share with a P/E ratio of approximately 40. As a younger growth-phase company, the stock does not currently pay a dividend. the company has consistently found ways to innovate products that penetrate mature markets. It tends to appeal to younger market segments, and it often prices its products at a premium for its perceived quality of innovative materials and designs.

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Undervaluation Nike, Inc. is currently trading at 19.5% discount to the company’s average three-year forward P/E multiple of 24.21x. In Q1 of FY 2016, Nike reported $9.1 billion in sales, a 8.3% YoY increase. Despite surpassing top line expectations, investors began discounting Nike when it reported single-digit growth for future orders in Q1 of FY 2016. Although sales were impressive, many analysts were concerned with Nike’s ‘future order’ numbers. Future orders are a Nike-invented system that gets distributors to agree to future contracts for the sale of products before Nike ships it. Those numbers were down to 5% growth worldwide and 1% in North America YoY. Analysts believe these numbers indicate short-term growth within the company. The primary reason future orders are down being due to Nike’s decreasing market share within footwear and apparel to competitors like Under Armour, Adidas and Lululemon Athletica Inc. Future orders figures serve to be misleading and outdated as it is just one of many revenue streams for Nike and therefore Nike has decided to stop reporting it after this quarter. Future orders do not take into account Nike’s direct-to-consumer sales. The contribution from direct-to-consumer sales has been steadily rising over the past few quarters, making up 24% of the Nike brand’s revenue in Q1 & Q2 of FY16, compared to 22% in FY15. We believe that with the news that Nike will no longer report “future orders” this will keep analyst more optimistic about short term growth. The combination of our valuation methodologies, strong Q1 earning results and the attractive growth of both e-commerce and China sales solidifies our opinion that Nike is a value opportunity with favorable growth prospects.

Fair Value Calculations

To calculate a fair target price, we used two different valuation multiples/methodologies to see the various ranges of target prices. Our sector calculated our fair value estimates using forward P/E and historical EV/EBITDA multiples. Using consensus NTM EPS of $2.37 estimates with an average three-year forward P/E multiple of 24.21x we calculated a fair value estimate of $57.38. Using consensus LTM EBITDA estimates of $13,192 million with an average one-year historical EV/EBITDA multiple of 19.98x we calculated the fair value estimate of 56.27$. Our sector decided to derive our target price using the company’s average three-year forward P/E multiple of 24.21x, which calculates a fair value of $57.38, implying Nike Inc. is trading 18.21% below its intrinsic value.

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APPENDIX

Exhibit I: Three-year price graph

Exhibit II: Three-year historical and forward P/E

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Exhibit III: Three-year historical and forward EV/EBITDA

Fall, 2016

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DISCLAIMER This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the author’s opinions. The writer does not own any Nike stock.

TUIA STATEMENT Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in “real-world” principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Fund’s goals are threefold:

Provide students with hands-on investment management experience

Enable students to work in a team-based setting in consultation with investment professionals.

Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.