Attractive award
Valuation metrics such as P/S can be useful to investors in deciding whether a stock is attractively valued. Another key metric is the price-to-earnings (P/E) ratio, which can help to better understand the concept.
Suppose a company earns investors $10 per share per year and each share is valued at $100. This would give it a P/E ratio of 10. If you had $100 to buy one share, you would get your money back in 10 years if earnings remained stable. Conversely, if the company earned only $1 a year (and thus had a P/E ratio of 100), it would take 100 years to get your investment back. That wouldn't be so attractive anymore.
In Nike's case, its P/E ratio is 20, which is also the cheapest in a decade. That's why it's never been cheaper to become a Nike shareholder. But not all cheap entry points are worth buying. Is Nike's low share price an opportunity to buy or a signal for investors to avoid?
What can Nike shareholders expect?
Among the things that can increase the value of a stock is earnings growth. But for Nike, given its size, growth is hard to achieve. Its sales grew less than 1% in fiscal 2024, and management expects a slight decline in sales in fiscal 2025.
Another useful factor for investors is improving profit margins. But in Nike's case, this is not a realistic expectation. This is a mature business and its margins have remained in a narrow range for a long time. They are unlikely to improve significantly in the near term as there have been no structural changes in the business.
On the other hand, Nike's margins are good and management often returns cash to shareholders through share buybacks and regular dividend payments. Over the past five years, share buybacks have helped boost earnings per share (EPS) by nearly 40% and management has increased dividends by nearly 70%.
Share buybacks and dividends are two of the biggest positives Nike shareholders can look forward to.
Is Nike stock a buy at these low levels?
Nike is not necessarily a risky investment, this business is well established. But it's not growing significantly. Investors can hope for modest revenue growth after fiscal 2025.
If you're a value investor, Nike may sound tempting as it trades at its lowest levels in a decade. But before you get the impression that this is a unique buying opportunity, it's important to consider a few contextual factors.
Nike stock recently traded at its lowest valuation in a decade -YES. But in terms of P/E ratio, they don't trade at a much cheaper valuation than the average stock in the S&P 500 index. Nike shares are not a bad investment today, but their returns from this point forward may be mediocre, given their limited growth prospects. For this relatively average opportunity, investors are getting a slightly below average valuation. This may make sense for some investors based on individual preferences, but others may seek better opportunities elsewhere.
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