Financial Statement Analysis

NIKE Case

Due April 30, 2004

 

Relevant Links:

o       NIKE preliminary spreadsheet with "as reported" information from NIKE 10-Ks and a baseline reformulation.

o       NIKE analysts' forecasts.

o       Prototype full spreadsheet based on Reebok (with "as reported", reformulation, ratios, options, analysts' forecasts, valuation and valuation grid worksheet tabs).

o        Detailed explanation of the valuation page of the Reebok spreadsheet.

o        Valutation troubleshooting guide – this should help find your errors if your residual operating income valuation does not equal your discounted free cash flow valuation in your NIKE spreadsheet.

 

You are welcome to pick a company to substitute for NIKE if one interests you more. You are also welcome to use me as a resource throughout the process of completing this case.  Please keep in mind that you are welcome to work either on your own or in groups, but you must turn in your own spreadsheet and report. I anticipate that groups will: (a) discuss and develop a databank of materials related to each of the 11 requirements; and (b) develop the spreadsheet to the point where it produces the exact same free cash flow and earnings-based valuations and is flexible to be able to conduct sensitivity analyses of changes in the value driver assumptions underlying the valuation.  However, I expect each individual in the group to take home the flexible spreadsheet and what they learn from the group, manipulate the assumptions underlying the spreadsheet valuation, develop a valuation grid, write her/his own individual report and hand in both the final report (on paper) and spreadsheet (as a computer file) by 5pm on Friday, April 30th at the latest.

 

Requirements and suggested completion schedule:

1.      (by Feb. 11th): Obtain the full 1999 NIKE 10-K (go to the course WebPages, click on "Research Tips and Links", click on "SEC Edgar Search", click on "Companies and Other Filers", enter NIKE for "company name", click on CIK "0000320187", enter 10-K for "form type", click on "retrieve filings", and click on "10-K" in the row with the 8-26-1999 filing date.

2.      (by Feb. 11th): Find NIKE's income statement and balance sheet and provide the details of how you think I derived the following numbers: Core operating income; Tax on core operating income; Net operating assets; and Net financial obligations. Note: The numbers in the textbook are wrong – please go to http://leeds.colorado.edu/faculty/shanep/teaching/fsa/nike/nike.xls and click on the "reformulated" tab to see my suggested reformulation.

3.      (by Feb. 25th): Using the information in NIKE's 1999 10-K and in the spreadsheet provided at http://leeds.colorado.edu/faculty/shanep/teaching/fsa/nike/nike.xls, determine the most important components of the company's net operating asset turnover (ATO=sales divided by average net operating assets) and core profit margin (PM=core after-tax operating income divided by sales).  Develop a spreadsheet that computes ATO and PM from your detailed components (plus other components, as needed) for the years 1995-99.

4.      (by Mar. 3rd):  Find NIKE's stock price as of the end of its 1994 fiscal year and as of the end of its 1999 fiscal year.  Write a paragraph or two describing the comparing the change in stock price (adjusted for any stock splits) over this five-year period and changes in the key value drivers that you identified in (3) above.  Explain why you do or do not think the value drivers justify the change in stock price over this period.

5.      (by Mar. 10th): Expand the spreadsheet you started in (4) to include forecasts of ATO and its components for 2000-2020. Your ratios should become constant no later than the year 2020. Prepare a short (one- to two-page) summary that explains the reasoning underlying your forecasts.

§        Click here for analysts' EPS and Sales forecasts as of July-September 1999.

6.      (by Mar. 17th): Carefully review NIKE's 1999 10-K and determine whether you need to adjust your forecasts for any hidden expenses (e.g., stock option compensation). Explain how this adjustment affects your forecasts and make the adjustments on your spreadsheet.

7.      (by Mar. 31st): Expand your spreadsheet to compute residual operating income and free cash flow for each forecast year.

8.      (by Mar. 31st): Expand your spreadsheet to compute the value of the firm's outstanding common stock at the May 31, 1999 balance sheet date. Check the internal consistency of your spreadsheet by making sure you get the same values using the residual operating income and discounted free cash flow valuation models.  Assume an 11% enterprise cost of capital throughout this case.

9.      (by Apr. 7th): Carefully review NIKE's 1999 10-K and determine whether you need to value any unrecorded financial obligations (e.g., the stock option overhang). Following the approach we took in Minicase M8.1, include the computation of the value the option overhang in your spreadsheet.

10.  (by Apr. 14th): Describe a set of assumptions about the value of net financial obligations and forecasted ATO, PM and sales growth that might support NIKE's stock price as of your valuation date.  Choose a valuation date that assures that the market had access to all of the information you used in your analysis.  For example, if you rely on analysts' forecasts issued during September 2000, then your valuation date should be September 15, 2000 (the date those forecasts were published).  Assume an 11% enterprise cost of capital throughout the case.

11.  (by Apr. 21st): Following the approach exhibited on the "valuation grid" worksheet included in my Reebok valuation spreadsheet (http://leeds-faculty.colorado.edu/shanep/teaching/fsa/exams/reebok_valuation_2.xls), develop a valuation grid on your NIKE spreadsheet and use this to justify your buy, sell or hold recommendation for NIKE as of May 31, 1999.

1.      Extra credit (by Apr. 28th): I will add 10 points to either your midterm or final exam scores if you provide a well-constructed two-page summary of your reaction (or what you learn) from browsing through the links provided at the following webpages:  http://www.nike.com/nikebiz/nikebiz.jhtml?page=25, http://www.globalexchange.org/economy/corporations/nike/index.html, and http://www.reclaimdemocracy.org/nike/.  Your two-page summary should include your perception of Nike’s social responsibility performance, and an indication of how information about NIKE’s social responsibility performance might affect your recommendation in (11) above?