Earnings season is coming

With the recent struggles of Nike stock over the past couple of years, many Nike employees are wondering what to do with their stock. Whether it is to diversify into another investment or to fund expenses like vacation, remodels, or tuition for their kids, the current price has made those decisions more difficult. A common question we hear is “Should I sell my NKE now or wait?”

NKE has recently experienced declines. From Sep 2022 to August 2023, NKE fell -4.49% while the S&P 500 has risen 15.58%. Nike had a great run of outperforming the S&P 500 for 10 out of 12 years prior to 2021 but has been on a losing streak since.

Is Nike poised to make a comeback? Predicting the future of any stock, or the market overall, is a difficult task. Nike is the industry leader in athletic apparel, particularly in footwear. If Nike can maintain their brand and industry leadership, they are poised to be successful. Achieving outperformance relative to the S&P 500 is not guaranteed.

Let’s look at a few different ways to approach valuing a stock to get a sense of if NKE appears over or undervalued.

🍰 Price / Earnings (P/E) ratio - how much are you paying for each dollar of earnings:

• Pros: Earnings are the profits of the company, and those profits are ultimately what is available for shareholders as dividends

• Cons: Easily manipulated or adjusted by many line items on the income statement, can vary greatly year to year

• Current P/E: 29.84

• 3 year median P/E: 36.26

• Implied Valuation based on $3.23 Earnings Per Share = $117.12

• Verdict: Undervalued, hold your NKE for now

💰 Price / Sales (P/S) ratio – how much are you paying for each dollar of revenue:

• Pros: Less subject to manipulation or fluctuation

• Cons: Doesn’t consider efficiency (i.e. costs necessary to generate the revenues)

• Current P/S: 2.95

• 3 year median P/S: 4.62

• Implied Valued based on $32.63 revenue per share = $150.70

• Verdict: Undervalued, hold your NKE for now

🔄 Price / Free Cash Flow (P/FCF) ratio - How much are you paying for each dollar of operating cash:

• Pros: Shows cash actually available to investors for dividends or stock buybacks, ignores non-cash expenses (i.e. depreciation)

• Cons: Still subject to manipulation based on accounting practices, can vary greatly year to year

• Currentl P/FCF: 31.06

• 3 year median P/FCF: 43.98

• Implied value based on $3.10 free cash flow per share = $136.50

• Verdict: Undervalued, hold your NKE for now

🥣 Average of all ratios:

• Take the average of the implied values for P/E, P/S, and P/FCF

• Implied Value = $134.77

• Verdict: Undervalued, hold your NKE for now

🚀 Price / Earnings Growth (PEG) ratio = P/E ratio / Earning Growth – measure P/E in context of company’s growth rate

• PEG < 1 implies undervalued, PEG > 1 implies overvalued.

• Currently: 29.89 / -16.46 = -1.81

• Decrease in EPS results in negative value.

• Forward 1 year: 1.775

• Verdict: Overvalued (sell your NKE now).

Based on historical averages, NKE currently appears undervalued

You can also take different time periods for the median of these valuations, to see what Nike’s valuation has been like over a longer period of time.

Note: All data courtesy of YCharts as of:  9/15/2023

While Nike may appear severely undervalued on a 3-year basis, the difference is smaller over 5-year and 10-year medians. If you’re thinking about selling, these valuations may give you some guideline thresholds to re-evaluate at.

Based on historical averages for NKE, the stock currently appears undervalued. The decline in NKE’s price in recent years is a big reason for that. Whether the decline will continue, or NKE will return to its historical valuation norms nobody knows. Looking at the basic fundamentals, NKE appears healthy overall. 

• Earnings & revenue have continued to grow.

• NKE has consistently sold its products above the cost of those goods.

• NKE can cover both its current and longer-term debt needs based on existing cash and future expected earnings.

• NKE has not missed a dividend in the past 10 years.

These metrics are by no means the only way to approach whether now is a good time to sell your NKE stock. Other factors to consider:

• The amount of time you think you will work at Nike.

• How much of your Net Worth is tied to NKE?

• When do your Stock Options expire (if applicable)?

• Your comfort level with the ups and downs over time.

• Do you have any major expenses coming up? i.e. house purchase, funding college, etc.

We’re here to help

Beyond these factors and metrics, it is important to integrate your Nike stock decisions within the context of a comprehensive financial plan. If you have questions or would like to discuss whether to hold or sell your NKE stock, please reach out to us at nike@humaninvesting.com.

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For many years, Stock Options have been a foundational part of compensation for Nike leaders.  They have provided a unique opportunity to build significant wealth by participating in the success of Nike.  While Stock Options can have a great impact on your financial landscape, they can also create considerable confusion. In our experience working with Nike leaders, we have found that there are often misunderstandings about Stock Options and how they differ from actual shares of Nike stock. While we are responsible for the financial planning intricacies for our Nike clients, we wanted to provide a background on Stock Options and share the most important factors to fully maximize them.  

What are Nike Stock Options and how do they work?

Nike Stock options are the right to purchase shares of Nike at a set price (exercise or strike price) that lasts for up to 10 years.  I like to think of them as “coupons”, where you can use your coupon to buy an item for a price that is lower than it is currently worth.  Once you have used your coupon, you could proceed to immediately sell that item for the current price, capitalizing on the difference between the coupon price and the current market value.

Value of Stock Option = # of Options x (Current Stock Price - Exercise Price

To illustrate the difference between stock and Stock Options, it only seemed appropriate to use a shoe analogy.  Imagine you are given access to Limited Release Jordan shoes, and you have two different choices to select from:

So which choice is better for you?  It depends on what happens to the value of those Jordans in the future.  Will the value increase or decrease and by how much?  Do you need another pair of Jordans today? Or can you wait until the future to use them? To better understand how it can all play out, we put the 2 Choices against each other in three head-to-head matchups to determine the winner in each situation.

ROUND #1: Value of SHOES drops -10% to $900. 

Shoe Choice: you are still left with shoes that you could sell for $900 or keep if you think the value could recover and grow further.

Coupon Choice: your 10 coupons are worthless since there is no value in purchasing shoes for more than they are worth at $1,000 per pair.

WINNER: Shoe Choice

ROUND #2: Value of shoes increases +10% to $1,100

Shoe Choice: your shoes are now worth $1,100 and the value has increased by $100.  You can sell them or keep them if you think the value could continue to increase further.

Coupon Choice: your coupons would allow you to purchase 10 pairs of shoes for $10,000 (10 coupons x $1,000 per pair).  You could them resell them for $11,000 (10 pairs x $1,100 per pair) and earn a profit of $1,000 ($11,000 value - $10,000 purchase cost).

WINNER: Shoe Choice

ROUND #3: Value of the shoes increases +50% to $1,500

Shoe Choice: your shoes are now worth $1,500 and the value has increased by $500.  You can sell them or keep them if you think the value could continue to increase further.

Coupon Choice: your coupons would allow you to purchase 10 pairs of shoes for $10,000 (10 coupons x $100 per pair).  You could them resell them for $15,000 (10 pairs x $1,500 per pair) and earn a profit of $5,000 ($15,000 value - $10,000 purchase cost).

WINNER: Coupon Choice

THE POST MATCH ANALYSIS

Round #1: Shoe Choice (Nike Stock) won and underscores the risk of Stock Options and how the value can become $0 if the stock price does not increase. 

Round #2: Shoe Choice (Nike Stock) won but only by a small amount.  Even if the stock grows, low growth still favors Nike Stock over Stock Options. This is common if Stock Options are held for a short period of time. 

Round #3: Coupon Choice (Stock Options) won by a significant amount.  Substantial growth in Nike stock will favor Stock Options by a wide margin. 

UNDERSTANDING THE OPPORTUNITY AND RISK

The Shoe & Coupon Choices shows how the Stock Options can perform from the beginning, but what about Stock Options that you already own and have existing value?  At Human Investing, we created a Stock Option Volatility Analysis to show what the upside and downside volatility can be like for existing Stock Options.

If you examine the outlined bars, you will note that a 15% increase in Nike Stock price would result in a 101% increase in the value of that Stock Option. At the same time, a 15% decrease would drop this Stock Option value by -101%.  The owner of Nike Stock Options should be prepared and ready to experience significant short-term declines like the ones shown in the chart above.

The key to capturing the upside potential of Nike Stock Options is having a long enough time horizon.  Stock prices can quickly move up and down in the short-term but have a history of growth over the long-term (10+ years).  If you own Stock Options and can wait long enough before you exercise and sell them, that will give you the best probability of maximizing the value.

WHAT HAPPENS WHEN YOU LEAVE NIKE?

Since a longer time horizon is one of the most important components for success with Stock Options, what can disrupt that opportunity?

If you leave (voluntarily or involuntarily) Nike, you typically have up to 90 days to exercise your vested stock options and all unvested stock options are forfeited.  While it is uncommon, there have been some exceptions where the 90-day time period is extended.

In addition, if you meet specific “retirement” criteria, you can receive more favorable vesting for your unvested options.  There are two “retirement” benefits that are unique to Nike stock options:

1) Early Retirement: Age 55-59 with 5 years of Service

• Unvested Stock Options (less than one year prior to separation) will be forfeited. 

• All other unvested Stock Options will continue per the original vesting schedule.

• After your retirement date, you will have up to 4 years to exercise your options. 

2) Normal Retirement: Age 60+ with 5 years of Service

• Unvested Stock Options (less than one year prior to separation) will be forfeited. 

• All other unvested Stock Options will become fully vested as of the retirement date.

• After your retirement date, you will have up to 4 years to exercise your options.

The special retirement vesting options described above can be an extremely valuable benefit to plan for and take advantage of if you are close to or at age 55+.

HOW ARE STOCK OPTIONS TAXED?

As Stock Options vest and grow in value, there is no tax along the way.  Tax is only recognized when you exercise your options.  The dollars are taxed in the same way as your salary, at ordinary income tax rates, which can be as high as 55.45% since it includes federal, state, Social Security, and Medicare taxes.  This can push you into a higher income tax bracket and often disrupts your tax liability if not adequately planned for throughout the year. 

TAX & PLANNING STRATEGIES

Strategy #1 – Spread Option Exercises Over Multiple Years

Since exercising Stock Options creates additional taxable income, carefully exercising the right amount and dividing it over more than one year can help you lower your overall taxes. 

For example, assume you have taxable income is $450,000 and have $350,000 of Stock Options that you want to exercise. Your current income of $450,000 would be in the 35% tax bracket (2021) and you will not move up to the 37% tax bracket until your income exceeds $628,301 (2021).  That leaves room for $178,301 worth of stock exercises that would be taxed at 35% before it reaches the 37% bracket.  If you spread the $350,000 of exercises over two years ($175,000 per year) instead of exercising the entire amount in one year, you could avoid the 37% bracket and save about $3,500 in Federal taxes.

Strategy #2 – Coordinate Option Exercises with the Nike Deferred Compensation Plan

Another strategy is to coordinate the timing of your Stock Option exercise with the contribution of a similar amount of salary and/or bonus into the Nike Deferred Compensation plan.  This strategy requires the following steps:

• Step 1: Determine the amount of Stock Options you wish to exercise. As an example, we picked $300,000 of stock options to exercise.

• Step 2: Elect to defer the same amount ($300,000) into the Nike Deferred Compensation plan from your salary during Open Enrollment.

• Step 3: Exercise and sell $300,000 of Stock Options in the same tax year as you are contributing $300,000 to the Nike Deferred Compensation Plan

• Step 4: Use the proceeds from the $300,000 of Stock Option exercises to replace your salary and support your living needs.
  In the end, you would have essentially funneled your Stock Option proceeds into the Deferred Compensation plan and avoided paying any additional taxes. 

Learn more about the Nike Deferred Compensation Plan.   

Nike stock options are an incredible opportunity

Although Nike Stock Options are often misunderstood, they can provide an incredible opportunity to generate wealth.  To really maximize of the opportunity, we recommend that you are prepared to navigate the volatility, complexities, and tax strategy. 

If you have any questions or want to know more about how to handle your Nike Stock Options, please get in touch.

You can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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As we approach the end of 2019, a common topic for discussion with our Nike clients is around planning for charitable contributions.  Nike employees have many factors to consider if they are hoping to maximize both the Nike Donation Match program and the tax benefits of charitable contributions.

MAXIMIZING THE NIKE DONATION MATCH PROGRAM

In order to maximize the impact to your chosen charity, the first step is to find out if it is qualified for a match.  To check the qualified donation match list, simply log into the Nike Give Your Best website: https://nike.benevity.org/user/login.

Next, consider the matching rules and limitations outlined below.

Nike Donation Match Details:

• Dollar-for-dollar match for charities on the qualifying list

• Double match for donations to charities aimed at youth sports 

• Maximum donation match of $10,000 per calendar year

• Grant of $10/hour for volunteer hours up to a maximum of $1,000/year

Additionally, Nike has participated in Giving Tuesday, which was Tuesday, December 3rd this year.  If you make donations on Giving Tuesday, Nike will make a double match on all qualifying charities.  Thus, planning to make your donations on Giving Tuesday could be a great way to maximize the benefit to your charity.

Once you determine that your charity qualifies for the donation match and the amount you want to give, the next step is to decide how to fund the donation.

WAYS TO FUND THE DONATION

The most common method of funding a donation to charity is by contributing cash.  However, a frequently overlooked opportunity is to make contributions from appreciated investments.  For Nike employees this is typically some form of Nike stock.

There is an additional tax benefit to using appreciated investments for your donation.  All appreciated investments would normally be subject to taxes upon selling the investment, but this can be avoided/minimized if it is first transferred to and then sold by the charity.   The charity receives the investment, sells it immediately and the cash proceeds are used for the charitable cause without tax consequences. 

Since Nike employees and executives typically own many different types of stock, we will explore the advantages and disadvantages of each type in addition to outside options.

1. Nike Stock - This is Nike stock purchased individually, outside a Nike employee benefit.  This can be a good option depending on how long you have held the stock.   The entire market value of the stock can be tax-deductible if considered long term gains (i.e. held for longer than one year).  If the stock is held less than one year you only receive a tax deduction on the “cost basis,” which is the original amount you invested.  If this stock has the most growth (largest gain) of all your investments, then it could be one of the most tax-advantageous options for a donation.

2. Nike ESPP – Nike stock purchased through ESPP has a different set of tax implications and considerations.  Nike allows you to purchase the stock at a 15% discount and that discount is taxed as income whenever you sell the stock.  The discount is also taxable upon donating the shares to charity.  Additionally, the holding period to get the best tax treatment and receive a full deduction for the full market value is longer than normal Nike stock as described in the first scenario.  ESPP shares need to be held for at least 2 years from the grant date and at least 1 year from the purchase date to receive the optimal tax benefits.  Depending on the amount of growth in this stock, it may not be the best stock to utilize since the 15% discount will still be taxable upon the sale and the holding period rules may be challenging to track.

3. Nike Vested Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) – RSUs and RSAs generally vest over a 3 or 4-year period.  Once this stock is vested, the stock becomes just like normal Nike stock (see option #1) and therefore should be held for longer than one year before donating it to a charity.  Since the vested shares become the same as option #1, the benefit in donating these shares depends on how much it has grown.  As with other stock, the larger the gain the better as you will avoid higher taxes if used as a donation.  Unvested RSUs and RSAs are not available for donation to charity.     

4. Nike Stock Options – Stock Options are non-transferable and not available to donate to charities.  You may, however, exercise the option and either transfer the exercised stock or cash proceeds to the charity.  This method does not offer a significant tax benefit since income tax is paid on the option exercise.  If you exercised stock options and held them as stock for a long period of time with significant growth, then it could become a beneficial method.

5. Stock in a Different Company (i.e. Amazon, Google, etc.) – Nike employees that have worked for a publicly-traded company in the past typically own sizable amount of stock from their previous employer.  This can be a good way to divest of that stock and diversify without having to pay additional taxes when sold.

6. Other Stock/Mutual Funds/ETFs – If you have other outside investments those can be also be an effective gifting option. These follow the same holding period rules as option #1.  Again, comparing the amount of gain in these investments versus other types of Nike stock is important in evaluating the optimal gifting and tax benefit option.

Once you have made the donation with one of the options above, make sure that you receive a receipt and submit it through the Give Your Best platform within 90 days of the donation.

Other Considerations

• Be mindful of the Nike Blackout period.  If you are an executive that is subject to this restriction, when selling Nike stock during certain times of the year you will want to make sure that you do not donate Nike stock during the Blackout Period.

• Tax Deductibility of Charitable Contributions: Charitable tax deductions changed significantly in 2018 with the recent tax law change from the Tax Cut and Jobs Act of 2017.  Be sure to check with your CPA or Financial Planner to see if your charitable contributions are tax-deductible for this year.  If they are not currently tax-deductible, you still may be able to take advantage of the tax deduction using a strategy known as “bunching.”  See the Human Investing blog post for details on the “bunching” strategy HERE.

• In addition, based on your total income, there may be limitations to the amount of your deductions in any given year.  Limitations are determined by your Adjusted Gross Income on your tax return. If you cannot take the full tax deductions now due to this limit, those deductions can be carried forward for up to 5 years in the future.

As we have outlined above, there are many options for Nike employees to consider when marking charitable gifts to the organizations that are important to them while at the same time maximizing the tax benefits.  These strategies can also be an effective way to diversify your exposure to one stock without having to pay a significant tax bill in the process. 

If you have questions or want to know more about how to plan your charitable giving as a Nike employee, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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