How Much Is Nike Worth?

Is Nike (NYSE: NKE) a growth company? Its fiscal first-quarter results certainly make it look like one.

Though Nike is already a massive, global footwear and apparel powerhouse, the company is finding ways to further expand all over the world. In particular -- thanks in large part to Kobe Bryant -- it's finding a large and receptive market in China, as well as many of the other fast-growing emerging markets.

So is it time to start snatching up shares of Nike? Well, first we need to get an idea of what its shares are really worth.

It's a beautiful day in the neighborhood
To do so, we can start by examining  how similar companies are valued, and how Nike stacks up:

Source: Capital IQ, a Standard & Poor's company, and Yahoo! Finance. Average excludes Nike.

Using each of those averages to back into a stock price for Nike, and then taking the average across those results, we can come up with an estimated price-per-share of right around $60. This would suggest that at nearly $78, the shares are overvalued right now.

A comparable-company analysis like this can sometimes raise as many questions as it answers, though. For instance, is the entire industry properly valued? A supposedly fairly valued -- or even overvalued -- stock in an undervalued industry may actually be an undervalued stock, and vice versa.

Additionally, while these companies are comparable, they're certainly not all the same. For example, Limited Brands and Polo Ralph Lauren both sell apparel, but much of that apparel consists of intimates from Victoria's Secret and Polo's preppy fashions. Even Under Armour, which has a very similar business to Nike, is still much smaller and faster-growing. And frankly, when we stack all of these against a company like Nike, there's an argument that Nike should carry a higher valuation, because it's simply a better company with a stronger brand.

With all that in mind, it's best to combine comparable-company analysis with another valuation technique: a discounted cash flow (DCF) analysis.

Collecting the cash flow
Basically, this method projects free cash flow over the next 10 years, discounting the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses), and it attempts to predict the future, it can be a fickle beast. You're better off using its results as guideposts, rather than written-in-stone answers sent down from Mount Olympus.

For Nike's DCF, I used the following assumptions:

Source: Capital IQ, a Standard & Poor's company; Yahoo! Finance; author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers at which I tend to thumb my nose.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of $68 for Nike's stock. This seems to confirm that Nike's shares are overvalued right now.

Do we have a winner?
The valuations that we've done here are pretty simple. Particularly when it comes to the DCF, investors would be well-advised to play with the numbers further before making a final decision on Nike's stock.

That said, with a price range of $60 to $68, the stock doesn't look all that attractive. At the midpoint of that range, the stock would be more than 20% overvalued.

I look at Nike as well-run company with great products -- of which I own many -- and one of the best brands in the world. It's certainly a company that I'd like to call myself an owner of, but I'd rather do so at a more attractive price. So for now, at least, I'll be keeping Nike on my watch list while I look for better opportunities.

Do you think I'm wrong, and that Nike is a great value right now? Head down to the comments section and share your thoughts.

Soberly valuing stocks before you make a buy or sell decision is a smart move. Listening to this advice isn't.