Is Nike Overvalued?

In this segment from the Motley Fool Money podcast, host Chris Hill is joined by Fool senior analysts David Kretzmann, Seth Jayson, and Jason Moser to consider the valuation of athletic wear major Nike (NKE 0.66%), which brought in almost $10 billion in its fiscal first quarter. Despite a strong report, shares were flat on the week, and for a variety of reasons, the Fools think that may make sense.

While its P/E ratio has been skewed higher temporarily by a one-time tax hit, even after factoring that out, it's still priced like a growth stock when it's already massive. However, there are other reasons to like its outlook, and our guys weigh the pros and cons.

A full transcript follows the video.

This video was recorded on Sept. 28, 2018.

Chris Hill: Nike's first quarter revenue came in just shy of $10 billion, but shares of Nike were flat this week. Seth, this is a great company, but this increasingly looks like a pricey stock.

Seth Jayson: Yeah, and I have a hard time decoding why. If you just look at a page on the internet, it looks like it's trading for a 65X multiple, which is crazy. They had a big tax bill in the trailing 12 months, which moved things about $1.25. On a more normalized basis, they're trading at about 35X earnings. That may not sound like a lot, but you have to consider, Nike is already a huge company. It's growing the top line in the 8-10% range. Digital is going quickly. They have some interesting innovations that might help them a lot on the cost side in shoes. But it's still tough to swallow.

On the other hand, their returns on capital are great. They are doing a super job of connecting directly with consumers through apps. People can order specialized shoes that way. Their wholesale shipments have been good. They're doing an amazing job in China. There's still a lot of growth left here, and people are willing to pay up for it.

David Kretzmann: I agree on the valuation front. Really, no matter which way you slice it, the valuation looks to be on the pricier end of the spectrum. Another way to look at it is the dividend yield, which right now is under 1%. That's toward the lower end of its historical range over the past five to 10 years.

I'm personally a Nike shareholder. I built up a position over the past couple of years. I'm thinking maybe this is a time to lighten that position a bit. If and when the price does drop, or the valuation improves, that's when you look to maybe build up a position again.

Jayson: Yeah. This company should definitely be on everybody's recession wish list. I don't know if I'd buy it right now. But, on the other hand, maybe I would, to remind myself to buy some more later, if and when it drops. They're doing a great job. They've really fended off Under Armour. Adidas is a strong competitor. They're just growing like a weed everywhere except North America, which is only about 6% growth.

Moser: Don't forget about Puma.

Kretzmann: Absolutely. You can certainly argue that the company does deserve a premium valuation. I'd say we're still on the high end of the spectrum here. The company generated $4 billion in free cash flow over the past year. That continues to increase. Really strong across the board.