A strict DCF of Nike (NKE): Is the Elliott Hill turnaround a Value Trap? My model says intrinsic value is $12.16.
With Nike bringing back Elliott Hill as CEO, the stock saw a relief rally and is hovering around $46. But as value investors, we have to separate brand nostalgia from the actual cash flows. I wanted to see if there is any Margin of Safety left, or if the market has already priced in a flawless turnaround.
I ran a strict DCF based on their most recent financial realities. Here is the breakdown of my assumptions:
1. The FCF Baseline & Growth Nike’s Unlevered Free Cash Flow has plummeted to roughly $1.04 Billion over the trailing twelve months due to inventory issues and wholesale channel decay. To be fair to the new CEO, I modeled a solid 6.0% annual FCF growth rate for the next 5 years, assuming he successfully stops the bleeding to On Running and Hoka.
2. The WACC (Discount Rate) I used a strict WACC calculation based on their actual capital structure:
- Risk-Free Rate: 4.5%
- Beta: 1.32
- Debt-to-Capital: 10%
- Calculated WACC: 10.63%
3. Terminal Value Nike is a mature behemoth in a highly saturated market. I used a Perpetual Growth Rate of 2.5% for the terminal value, matching long-term inflation.
The Math & The Verdict: Discounting my 5-year recovery cash flows ($1.04B growing at 6%) and the terminal value back to present day, I arrive at a base-case intrinsic value of $12.16 per share.
Even if I assume they magically return to their 2021 peak margins tomorrow, it is incredibly difficult to justify the current $46 price tag mathematically without assuming an unrealistic perpetual growth rate.
Am I being way too punitive with my 10.63% discount rate, or is NKE a massive value trap right now? Would love to hear where the bulls think my math is wrong.