Nike deep-dive: Is it a falling knife or a bargain?

The case here is relatively straightforward: one of the biggest brands in the world is struggling. If it turns its fortunes around, a long-term investor could benefit substantially, but if it fails — what would be the downside and, overall, what could a reasonable investor expect?

There has been a lot of negative news around Nike, and some of it (related mostly to the stock price) is self-enforcing: the lower it gets, the worse the publicity becomes. It has also been announced that the stock is going to be dropped from the S&P 500 soon due to a significant decrease in market cap. Although this is indeed not good news, as Nike would no longer automatically be part of passive ETF purchases, we prefer to ignore it in our analysis below. The reason for this is that, in the long run, stock prices follow earnings (not news), and if Nike is successful in its turnaround efforts, the price will follow.

One cautionary note is that turning around a flagging business is generally really hard. There are a lot of examples of large consumer brands that lost their fortunes due to changes in tastes, technology, or some other factors and simply could not make it back.

So, let’s look at it in detail. We break it down as follows:

1. Nike’s overall business quality:
   1. Principal business model strengths and weaknesses
   2. Growth prospects
   3. Financials and debt level / balance sheet strength
   4. Management and incentives
   5. Our base case forecast
   6. TopFunds rank
2. Recent fundamentals performance vs. stock performance
3. What Nike is doing that its competitors don’t (or can’t) and how it is going to turn itself around
4. Our base case forecast
5. Our verdict