Issue It has been a week since Nike’s analyst meeting in which management unveiled a plan to revitalize the company. Kimi Ford wonders, is Nike a good buy for her mutual fund?
Background Nike’s recent market share has been declining. The new strategy that management introduced plans to develop a better mid-priced shoe, to push their apparel line and to put more effort into expense control. Lehman Brothers say that Nike is a strong buy, but UBS Warburg and CSFB analysts recommend not buying right now.
Analysis There are several different methods that can be used to find the WACC and use it to decide whether a stock will be a good buy or not. The Earning’s Capitalization Model is not appropriate in this case because it does not work well for growing companies, as Nike is trying to do, and the Dividend Discount Model has several subjective inputs making it inferior to the CAPM method of determining WACC. Using this method Nike’s WACC is found to be 9.8%. Using this Nike is found to have very good returns on capital, with a reasonable amount of debt, at not too high of a cost. This WACC figure is higher than the one that Ford used, but it still shows us that the stock is undervalued, but by only about $15. This leads to a recommendation that Ford’s mutual fund should add Nike to its portfolio, and from the financial and debt ratios calculated, we get information that says Nike should continue to grow to higher stock prices after reaching the price it was valued at