Is Nike Cheap or What?

There are few things a stock market vulture (err, I mean value investor) likes more than a bit of panic. A shake-up in the management suite is often just the thing to take a good company from "interesting" to "I gotta have it."

This was the case for me (as well as for my colleagues at Motley Fool Inside Value) when newsletter pick 3M (NYSE:MMM) lost its chief to Boeing (NYSE:BA), only to reel in a solid-looking executive who presided over some verifiable successes at Brunswick Corporation (NYSE:BC).

The bedraggled victim this vulture is circling today is Nike (NYSE:NKE). Unless you live under a rock -- a rock without a broadband connection -- you will have heard that Nike lost its CEO today. William Perez had been at the post for only 13 months and apparently came to some disagreement with founder and board chair Phil Knight.

But this isn't about the drama and the exquisite golden parachute Perez will receive. This is about your money -- and, OK, my money. Specifically, are we going to see a drop that moves Nike from being merely interesting to mouthwatering?

To get an answer, I started today's reevaluation with the easy stuff, like comparing the current P/E to the multiple the market is used to giving the firm. Today's P/E of 16 looks like a small bargain, given the firm's seven-year average P/E of 20, or the five-year average of 18. But P/E ratios are only a reflection of the market's past appetite for a stock. If I want to get a better handle on what I think Nike is worth, I turn next to that more involved model also used by my colleagues at Inside Value, the discounted cash flow valuation (DCF).

These can be pretty complex, but I like to keep them simple to begin. And my very conservative DCF thumbnail suggests to me that Nike shares are worth about $92 per share. That means today's prices offer only about a 10% margin of safety. But using a more sanguine growth estimate of 13% suggests that Nike's shares are worth more like $104 each, for a 21% margin of safety, which is a pretty good deal for one of the world's best-known brands.

Of course, that's always the devil in the machine of a DCF model -- the growth rate. Can you rely on those numbers? If they don't come in, what then?

But I think Nike can achieve growth of that range for three pretty simple reasons. Its returns on assets, capital, and equity have been on the rise for years and currently are at 14.6%, 19.9%, and 23.7%, respectively. Moreover, Nike's margins have also been on an upward march for much of the past half-decade.

Frankly, upon reappraisal, I'm not sure if I need to wait around, or hope for, a post CEO-switch panic. By my view, the shares are already pretty mouthwatering, a fact I suppose I acknowledged a few months back when I added Nike to my "lazy portfolio," alongside no-brain market beaters such as Starbucks (NYSE:SBUX) and World Wrestling Entertainment (NYSE:WWE). Would I like to see Nike cheaper? Heck yeah. But there are times when kinda cheap is cheap enough, and I think we're pretty close to that with Nike now.

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3M is a Motley Fool Inside Value recommendation.

Seth Jayson is a crazy nephew in the Motley Fool Inside Value team. Though he takes his holiday dinners at the proverbial card table while the grown-ups talk, he does have an uncanny record of finding kinda cheap stocks that later measure up to lead analyst Philip Durell's more stringent standards. Take a free trial to see what's already made the cut. At the time of publication, Seth had shares of 3M but no positions in any other company mentioned. View his stock holdings and Fool profile here . Fool rules are here .