🗞️ Can Nike Just Do it Again?

WHILE YOU POUR THE JOE… ☕️ 
Scan the Market, Goldman Style

This morning, in about 3 hours (more like 2 by the time you read this), the ISM manufacturing PMI index will be released, and it will likely move markets in a new direction📈.

Why should you care about the PMI? It is exactly what hedge fund traders look at when scanning the markets for idea generation🧠, and it’s what investment bank traders look at when pumping up idea delivery on the sales and trading desk.

Whether on the buy or sell side, you can also get this POV of which industries are likely to break out (or down) in the coming months and why so that you can sound better prepared for an interview or straight outperform your peers.

I’d like to send you my personal Excel model🤝, which has kept up with the PMI trend for over a year and is already updated for today’s data (just for you).

Just one favor, can you repost our Twitter thread on Nike stock? Whether on Twitter or LinkedIn, whichever is fine. Once you do, you can reply to this email, or send a new email to [email protected] with the subject line “I’m ready for my model”.

Speaking of Nike, let’s get on with today’s email💻️…

QUALITY ADDITION TO YOUR ASSET BASE
At Least They Still Got Ronaldo and James

Nike (NYSE: NKE) isn’t really a stock we’re used to watching, as most at InvestiBrew are in their 20s and just looking to accumulate high-quality assets so we can live off them in our 30s.

But, at these prices, Nike is starting to look like one of those stocks we want to add to our ‘future wealth’ list💰️. Last Friday, the stock went down nearly 20%📉, but the options chain for the stock told us a different story.

So, we got digging. After hours of modeling and research, we came up with the same conclusion, and Max and I pushed the buy button on this incredible deal.

Keeping it Real
We typically go about these things with two questions, especially when looking at a company as big as Nike ($114 billion market cap).

1. Do we think Nike will be around 10 years from now?

2. If we gave someone $114 billion to make another Nike, could they?

You can probably guess the answer to these two, and given how favorable they were, we fired up Excel to do our due diligence.

Nike’s revenue is so back🍾, with the last twelve months (LTM) pushing out $51.2 billion; it is now above pre-COVID levels of less than $40 billion.

Gross margins are doing okay and are back to pre-COVID, so that’s a good thing. Regarding EBITDA (the funniest word in finance) and net income, the stock is doing better than - almost - ever.

So, why did the stock plummet so much?

Expectations. Markets are riding on the easy money days of 2021-2023 when low interest rates and a high VIX got everyone in the bad habit of making double the profit in half the time.

But today’s market is a lot different. With bad economic data coming out month after month, high interest rates, and a low VIX, it seems the only way to buck in this market is by sticking with solid fundamentals.

Nike Has a Good Amount of Those
Look, I’ll be honest, my money senses started flashing👀when I saw this chart for Nike:

Free cash flow (operating cash flow minus capital expenditures) is near record levels, except for 2021, when inventory spending was nearly nonexistent.

You can check how FCF as a % of sales is also staying within its historical levels, signaling a healthy company, to say the least (you don’t want to see too many jumps or any sort of declining trend).

Return on invested capital (ROIC) is where I got to wonder.
Quick tip: ROIC is calculated as —> Net Income / (Equity + Debt)

ROIC has yet to recover to the 16%+ mark it used to operate under, and debt is to blame. Because interest rates were so low before, it made sense for the company to leverage up a bit, but that does hurt ROIC.

Debt as a % of total capital rose from roughly 47% in 2018 to 62%. To settle it all, I decided to look at FCF yields (FCF / Equity) and see where Nike’s profitability is genuinely going. Here’s what I found:

Yields are back to near all-time highs, which gave us the green light to go through the painful process of projecting financials and valuing this company.

Assumptions
To do this properly - pay attention future investment bankers - and understand what drives and slows the company’s KPIs.

One of the cited concerns from other analysts and management is China's weakness😅. We respectfully disagreed after looking at this:

Tell me how China is a concern when earnings before interest and tax (EBIT) are performing nearly as well as North American markets? Fake news.

Also, how is the Chinese consumer weak right now when pretty much all of 2024 so far has delivered rising inflation readings. That doesn’t happen unless spenders be spendin’🤑.

Anyways, looking over these facts, we projected Nike’s financials on a worst case scenario as such:

Notice that revenue growth projections don’t match inflation or U.S. GDP growth, which is English for worse than the most likely reality.

Assuming this, the stock is worth roughly $94 a share, or 25% higher🔥than today’s price:

When we switch our projections to a more base reality situation, valuations go up to almost $128 a share, or 70% above today’s price 💫. To be frank, that’s where we want to see the stock go.

Is Nike Still the Best?
Markets seem to think so, as when compared against Lululemon Athletica (NASDAQ: LULU), Dick’s Sporting Goods (NYSE: DKS), and Gap (NYSE: GPS), Nike commands a few premiums.

Notice that Nike calls for the highest forward P/E ratio; English markets are willing to pay more for tomorrow’s earnings in Nike rather than all competitors.

On a price-to-free cash flow basis, Lululemon takes the cake. Still, we think that’s only because Nike needs to invest a lot in Chinese inventory to serve that market as it keeps waking up.

More than that, here’s what options traders think about Nike’s future:

This looks like Tetris, but it’s essential. Notice that lonely square right at the top? That’s our outlier. This means that many people wanted to go unnoticed when buying call options for $100, and their expiration date was September 2024.

That means a select group, or even a single big player, is betting on the possibility that Nike stock can hit $100 by September this year🎯. It is also our worst-case price target, so we feel pretty good about our analysis.

That’s all for today, folks. I can’t wait for the open bell to ring and load up some Nike stock for myself.

WEEKSTARTER STOCK
“Toyota is Toyota” IYKYK

Did you know the Japanese Yen is now at its weakest level against the Dollar in over two decades 📉?

That’s right, the USD/JPY currency rate is now almost $161, last time it hit this rate it was 1990, I wasn’t even born.

You may wonder, what does a currency rate have to do with the stock market? Well, a lot.

A weak Yen against the Dollar means that the U.S. - and other nations - can import a lot more Japanese goods, considering that they’ve now become cheaper to trade with.

This is good for Japanese stocks that do a lot of this exporting, and that’s where Toyota Motor (NYSE: TM) comes into play.

After the pandemic, the U.S. faced a new car inventory crisis, where you had to wait months or even a year to get your new car on the lot. Now, that’s being fixed by the goodwill of exporters like Toyota.

So, if the picture looks this good, why does Toyota stock look like this:

Simple: The Japanese government, particularly the Bank of Japan (BOJ), announced that it would intervene in the currency markets🛑to stop the Yen from falling this much against the Dollar.

And that would have the opposite effect on stocks like Toyota, as it would hurt exports.

We don’t think that’s going to happen. The Japanese manufacturing PMI has yet to break above 50% (anything above 50% is expansion, and below is contraction).

Now, why would the government hurt manufacturing when it is already suffering? Doesn’t make sense, so we think Toyota is a stock to consider today.

Some other things we like about the stock:

• Gross margins stand over 19%, which is really good for the automotive industry, especially in today’s global economy.

• Net margins are closing in on 11%, for reference, Ford’s net margins are only 2%🫢.

• ROIC of nearly 10%, and considering the stock has a $276 billion market cap, this rate of compounding will likely deliver a ‘I wish I bought it’ reaction 10 years from now.

• It’s P/E is below 10x, and that’s always a good thing especially for a stock this big, it’s cheap!

NOW GO AND MAKE IT HAPPEN
Outside the Box Due Diligence

Here’s a story on Nike, one you can read while you watch the stock recover and rally to our price targets and valuations🎯.

Consider it some extra due diligence, outside the box of finance and economics, and get to know the story and who is behind the stock you might look to buy in today’s book recommendation📖.

To your success,

G. 🥃