NKE faces value trap risk from falling earnings/FCF; potential bull case only if business transition restores prior growth levels.

Now I'll talk about stock number three, which is currently near its 52-week low. That is Nike, whose ticker symbol is NKE. And Nike's stock, one of the most iconic brands of all time, is doing very badly.

It has decreased by 75.9% in the last 5 years. It has fallen another 49.3% in the past year and is near its 52-week low.

But you do n't have to go that far back. This stock was the best performer in 2021 and has been on a great run from 1985 to its peak in 2021, with a total return of 502,000%. This is a compound annual growth rate of 25.96%.

Of the stocks I mentioned today, this is the best performer.

And the company has also maintained growth in dividends. It is a Dividend Aristocrat, having increased its dividend every year for over 25 consecutive years. The dividend has increased by 156% in the last 10 years.

This is a compound annual growth rate of 9.87%. So, despite the slowdown in dividend growth in recent years, this is the fastest growing of the ones I've shown today. However, its pace is slowing down.

The dividend has increased by 20% in the last 3 years, with a CAGR of 6.4%. And the latest dividend increase was only 2.5%.

And in terms of dividend yield, this is the highest dividend yield for Nike stock since 2007. Probably the highest of all time. At that time, its median dividend yield was 1.29%.

So, this is the best yield on cost you can get when it comes to Nike stock.

But the question is, will the dividend be reduced? Why is this a question? Because the free cash flow payout ratio doesn't look good. Now, objectively speaking, it was over 100% in 2020 and we are now on track to have a free cash flow payout ratio over 100% for two consecutive years. 110% in 2026, 110% in the last 12 months.

And it was a stock whose dividend had seemed very safe in the past. In 2021 it was 27%, in 2022 it was 41%. But one reason for this is that Nike's actual business performance is declining. We will discuss that in detail.

If you look at the income payout ratio, you'll see that it's not that bad. But it was a stock that had a payout ratio of 20 to 40% in good years. But now it is 77% in 2026, 77.1% in the last 12 months. This is for GAAP earnings per share.

And if we look at Nike's 10-year adjusted earnings per share, it's declining. It's been $2.09 in the last 12 months. Fortunately, it is improving and grew 414% year-over-year in the last quarter, but if the business cannot return to its previous earning power, this dividend will not increase and the stock will not be in good shape.

Nike's free cash flow is in very poor shape. $2.18 billion in the last 12 months, while the company's highest free cash flow was $7.2 billion. Huge deficit in business performance.

But to be fair, their performance has been inconsistent in previous years and I know they are going through a business transition now. So, this is an area where I should do more in-depth research on Nike stock and read their recent earnings reports, because it is in a transition phase right now.

Generally, I avoid these types of stocks unless the issue is very clear and I have done due diligence, and the stock is trading very cheaply. The stock has fallen 75% in the last 5 years.

It is now at its lowest valuation historically. The trailing P/E ratio for the last 12 months is 17.17. This is the lowest in the last 10 years, but the problem is, you have to be careful in this situation because earnings per share are falling.

And this is a bad situation, especially if it continues. And when a business starts to decline, it can become a value trap.

So, that's the real issue with Nike stock. If the change is successful and they can return to their previous highs and grow from there, it would seem like a great investment at current prices.

This is one of the cheapest multiples for Nike stock since 2007. But I like this fair value graph for this reason, because it shows a chart of the multiple over time and provides a possible fair value based on the median multiple, which is also based on earnings over that period.

So, you can see that Nike's earnings per share were increasing over time, the underlying value was increasing, but in recent years it has been decreasing. So, the share price is performing very poorly, but it is not trading at an abnormal fair value discount.

It is actually trading at a pretty good discount to its historical multiple. You see, 25.62 to 17.25, but it would have been even more surprising if they were still at their 2023 earnings level.

The reality is that Nike's revenue is declining, but they haven't cut their dividend yet. And you can also see another example with the dividend shown here. It is continuously increasing.

The inherent value of dividend payments is there.

And looking back to 2007, the median multiple was 1.22%. It currently has a dividend yield of 4.55%. If the stock ever returns to that 1.22% dividend yield, it would provide an underlying fair value with the potential to move higher from here.

But as I mentioned, Nike's case is entirely dependent on earnings performance, revenue and cash flow. If they can improve this, the stock will do well. Currently, analysts expect it to return to that level of 2025 within the next few years.

They are not expecting anything very good for the 2027 fiscal year. But by the 2030s, it could return to near that all-time high. And if that's the case, this drop in Nike's share price could be a very attractive buying opportunity.

And while making this video, I think it's time to do a little more due diligence on Nike stock. I need to understand the business better, read some recent earnings reports, analyze the market and competitors because the stock is now starting to get unusually cheap.

However, you need to do your own research to ensure that you are not falling into a value trap, where the business cannot recover and grow from there. Because if that happens, Nike's shares will never return to their previous price.