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nike-Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund




Question;NIKE, INC.: COST OF CAPITAL On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analystsR write-ups of Nike, Inc., the athletic-shoe manufacturer. NikeRs share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonaldRs, 3M, and other large-cap, generally old-economy stocks. While the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1%. At the end of June 2001, the fundRs year-to-date returns stood at 6.4% versus ?7.3% for the S&P 500. Only a week earlier, on June 28, 2001, Nike had held an analystsR meeting to disclose its fiscal-year 2001 results.1The meeting, however, had another purpose: Nike management wanted to communicate a strategy for revitalizing the company. Since 1997, its revenues had plateaued at around $9 billion, while net income had fallen from almost $800 million to $580 million (see Exhibit 1). NikeRs market share in U.S. athletic shoes had fallen from 48%, in 1997, to 42% in 2000.2In addition, recent supply-chain issues and the adverse effect of a strong dollar had negatively affected revenue. At the meeting, management revealed plans to address both top-line growth and operating performance. To boost revenue, the company would develop more athletic-shoe products in the midpriced segment3ea segment that Nike had overlooked in recent years. Nike also planned to push its apparel line, which, under the recent leadership of industry veteran Mindy Grossman,4 had performed extremely well. On the cost side, Nike would exert more effort on expense control. Finally, company executives reiterated their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15%. AnalystsR reactions were mixed. Some thought the financial targets were too aggressive, others saw significant growth opportunities in apparel and in NikeRs international businesses. Kimi Ford read all the analystsR reports that she could find about the June 28 meeting, but the reports gave her no clear guidance: a Lehman Brothers report recommended a strong buy, while UBS Warburg and CSFB analysts expressed misgivings about the company and recommended a hold. Ford decided instead to develop her own discounted cash flow forecast to come to a clearer conclusion. Her forecast showed that, at a discount rate of 12%, Nike was overvalued at its current share price of $42.09 (Exhibit 2). However, she had done a quick sensitivity analysis that revealed Nike was undervalued at discount rates below 11.17%. Because she was about to go into a meeting, she asked her new assistant, Joanna Cohen, to estimate NikeRs cost of capital. Cohen immediately gathered all the data she thought she might need (Exhibits 1 through 4) and began to work on her analysis. At the end of the day, Cohen submitted her cost-of-capital estimate and a memo (Exhibit 5) explaining her assumptions to Ford.1. What is the financial health of the firm? Analyze the historical balance sheet and the income statement? Assess ? where applicable ? CCC, SGR, FCF, Gross margin, Net margin, etc


Paper#49098 | Written in 18-Jul-2015

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