Breaking Down $AAPL Earnings

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After much anticipation, Apple released its first quarter earnings for FY 2013. As many of you know, this was a crucial earnings report following a 20% sell off over the last three months.

Apple announced that it had quarterly revenue and net profit of $54.5 billion and $13.1 billion, respectively or $13.81 per diluted share. These results can be compared to quarterly revenue and net profit of $46.3 billion and $13.1 billion a year ago, or $13.87 per diluted share. This is a 15.05 percent increase in revenue from a year ago, but a zero percent change in net profit. Furthermore, profit margin fell from 44.7 percent to 38.6 percent, yielding a 6.1 percent drop.

Despite narrowing margins, Apple sold a record 47.8 million iPhones. This can be compared to just 37 million iPhones sold in the year ago quarter. This is a almost a 30 percent increase in iPhone sales compared to the year ago quarter. Similarly, iPad sales increased from 15.4 million units to 22.9 million units, yielding a 49 percent increase. Sales of both mac and iPod fell modestly.

The tighter margins can be attributed to an increase in operating expenses compared to the year ago quarter. Specifically, spending in research and development increased 33 percent to $1.01 billion.

Sales in Europe, China and Japan increased 11, 67, and 25 percent respectively.  Currently, these three countries are supplying apple with 61 percent of its revenue.

Apple indicated that they expected revenue for the second quarter of FY2013 to be between $41 billion and $43 billion, with a gross margin between 37.5 percent and 38.5 percent. Furthermore, they expect gross expenses to be between $3.8 billion and $3.9 billion.

As we now await Q2 earnings for FY 2013, I expect international sales to increase and become an even bigger part of Apple’s revenue. The U.S. may not be saturated with regard to the entire mobile phone and tablet market, but it is saturated in the sense that people middle to upper class individuals who can afford Apple products can already afford them. On the contrary, international markets are largely untapped and whether it be through a cheaper iPhone or already existing products, I am expecting them to continue to tap these markets.

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The Business Behind the Bowl

 

With Super Bowl XLVII just two weeks away I figured it would be appropriate to take a look at the business side of the much-hyped game. The average ticket price this year is nearly $3,100. That means ticket revenues alone will be about $227 million. In 2012 it was estimated that Super Bowl fans would spend approximately $11 billion on Super Bowl related costs. To put it in perspective, that is more than Fortune 500 company, Stanley Black and Decker’s (SWK) revenue in 2011. However, one of the most unique aspects of this business is the highly anticipated commercials. This year companies have gone to great measures to promote their commercials even further. Anheuser-Busch went as far as airing a preview to their ad for their new product, Black Crown. The frenzy surrounding these commercials has grown year after year and the ads are now one of the biggest attractions for many of the viewers. The 2012 AFC Championship game had 48.7 million viewers. This was a record high number, however it was still trumped by the 111 million viewers attracted by the Super Bowl last year. That leads us to the question, why does the Super Bowl attract so many more people? Both games are played at a very high level and have background stories that make for great football games. The difference can be attributed to the unique experience that surrounds the game itself. It’s the one time each year when it is okay to have a party filled with beer, wings and pizza on a Sunday night. On top of all that, the Super Bowl is commercial free! Sort of.  During any other TV program the commercials are ignored, even hated. In a survey by BIGinsightTM 73% of people surveyed said they viewed the Super Bowl commercials as entertainment. Many people are more excited to see what Pepsico’s new commercial will be than they are to see the two Harbaugh brothers go head to head.

 

With over 110 million viewers likely for this upcoming Super Bowl, companies including Pepsico (PEP), Coca-Cola (KO), and Anheuser-Busch (BUD) have paid, on average, $4 million for a 30 second spot. But, is it really worth $4 million dollars? Over the past three years Pepsico, Coca-Cola, and Anheuser-Busch have seen their stock prices increase by 33%, 52%, and 90% respectively. While Coca-Cola and Anheuser-Busch have vastly exceeded the return of the S&P 500 during this time, 38%, Pepsico has not. These are three of the most noted companies in any Super Bowl advertisement discussion. However, no clear conclusion could be drawn regarding a correlation between their Super Bowl commercials and financial performance. Before writing this investment off, it is important to consider the size of the investment. $4 million dollars is just .08% of Anheuser-Busch’s sales and marketing expense for 2011. At such a minimal cost, it is difficult to claim that the commercials are a poor investment. With more than 2/3 of the US population watching, it is the ultimate stage for any company. Companies such as GoDaddy have built their entire brand image around their Super Bowl commercial. This opportunity can’t be found anywhere else. The survey by BIGinsightTM showed that 8.4% of people watching the Super Bowl claimed that the advertisements influence them to buy the product from the company. So, while these companies have not seen a directly correlated increase in their stock prices over the past several years, the have been able to take advantage of prime time exposure to develop their brands and position themselves well within their respective industries.

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My Favorite Exit & Entry Technical Indicators

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Relative Strength Index

Definition

The relative strength index is a technical indicator that looks at the speed and significance of historical price movements of a market or stock over a defined time frame. In it’s simplest definition, the relative strength compares the number of higher closes to the number of lower closes. A stock or market with more or stronger higher closes will demonstrate a higher relative strength index. On the contrary, a stock or market with fewer or weaker higher closes will demonstrate a lower relative strength index. The relative strength index is displayed as a ratio from 0 to 100.

Interpretation

The relative strength index can be used as an overbought/oversold measure. As I mentioned before, we know that if a stock has a higher relative strength index it will have more or stronger higher closes. In other words, a market or stock with a high relative strength index will exhibit rapid upward price movement.  Typically, stocks that are bought rapidly will become overbought. Overbought stocks or markets can be identified as ones which have a relative strength index of 80 or above. Wilder, who is the creator of the relative strength index, said that if a stock or market is oversold, it is bound to reverse at some point. Similarly, we know that if a stock has a lower relative strength index it will have fewer or weaker higher closes which will exhibit rapid downward price movement. Stocks or markets that are sold rapidly will become oversold. Oversold stocks or markets can be identified as ones which have a relative strength index of  20 or lower.Again, stocks or markets that become oversold will have to reverse at some point.

The Fast Stochastic

Definition

The stochastic oscillator is a technical indicator that uses key support and resistance levels to examine the momentum of a stock or market. The stochastic oscillator compares a stocks or markets current price to its price range over a period of time. When a stock or market’s current price moves towards the price ranges upper boundary, the stochastic oscillator will be higher. When a stock or market’s current price moves towards the price ranges lower boundary, the stochastic oscillator will be lower. The stochastic oscillator is displayed as a ratio between zero and one-hundred.

Interpretation

Similar to the relative strength index, the fast stochastic can be used as an oversold/overbought indicator. It is not unreasonable to see a stock or market trade within a certain range over a defined period of time. If a stock or market is trading with within a certain range, you can assume that as the price reaches the upper boundary, the stock or market becomes overbought putting downward pressure on the price. On the other hand,  as the price moves towards the lower boundary, the stock or market becomes oversold which puts upward pressure on the price of the stock. Generally, a stock or market is considered overbought if the fast stochastic is above 80 and oversold if they fast stochastic is below 20.

Using These Indicators

After conducting other supporting types of analysis, I use these indicators to determine an entry or exit point with regard to a particular stock or market. Generally, I look for both of these indicators to unanimously point to oversold or overbought. In my experience I find that if these indicators both point to overbought or oversold they are extremely accurate and can indicate the start of a upward or downward trend. These indicators, when used together, can prevent you from entering a stock in a downtrend or exit a stock in the middle of an uptrend. Even though they are both accurate on their own, they are much strong when combined.

Don’t Believe Me?

The SPY one year daily chart highlights this entry/exit technique in greater detail. The blue arrows all point to areas in which the relative strength index and fast stochastic are below twenty, or oversold. Using what I described above, we would expect that touching these levels would be followed by a moderate to significant upward price movement. As the chart illustrates, this held true.

You will also notice that if the indicators do not agree, they are not as powerful and often have price movements inconsistent with what I described above.

SPY

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As History Would Have It: An $AAPL Earnings Play

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What:

To profit from Apple’s earnings report this Wednesday, we are going to create a strangle using out-of-the-money options.

Why:

Date Estimate Actual Close Pre Earnings Close Post Earnings Percent Change
10/25/12 $8.75 $8.67 $609.54 $604.00 -0.91%
7/24/12 $10.36 $9.32 $600.92 $574.97 -4.32%
4/24/12 $10.06 $12.30 $560.28 $610.00 8.87%
1/24/12 $10.08 $13.87 $420.41 $446.66 6.24%
10/18/11 $7.28 $7.05 $422.24 $398.62 -5.59%

Simply put, I am making this trade based on history. Nothing more, nothing less.

Historically, Apple stock exhibits volatile and large price movements following it’s earnings releases. In fact, four out of the last five earnings reports have resulted in price movements of at least four percent. With that being said, it is not unreasonable to anticipate a significant price movement following Apple’s earnings report this Wednesday. In order to take advantage of this, we can employ a basic strangle using out-of-the-money options that will allow us to profit from a significant price movement, regardless of direction. A strangle also limits the loss of the position to the net cost.

How:

Price Call Strike Price Put
25.9 $485.00 $11.00
23 $490.00 $13.05
20.3 $495.00 $15.30
17.8 $500.00 $17.75
15.45 $505.00 $20.40
13.35 $510.00 $23.20
11.45 $515.00 $26.15
9.65 $520.00 $29.40

To successfully create a strangle, we need to take long positions in an out-of-the-money call and an out-of-the-money put. It is recommended that the strike prices of these out-of-the-money options be equidistant from the current price of the underlying instrument, which in this case is Apple common stock. The further out of the money the options are the cheaper it will be to establish the strangle and the smaller our max loss per contract will be. However, the further out of the money the options are, they less likely the strangle will expire in the money.

Currently, the price of the underlying Apple common stock is exactly $500.00 (Cool, I know). Using the January weeklys, which will expire this coming Friday (January 25th, 2012), I am going to take a long position in a call with a strike price of $510.00 and a put with a strike price of $490.00. These options are priced at a per contract cost of $13.35 and $13.05, respectively. Since we are taking a long position in both the out-of-the-money call and the out-of-the-money put, our net per contract cost is equal $26.40. Options contracts are usually denominated in terms of 100 shares meaning the absolute net per contract cost of this strangle is $2640.

Profit/Loss & Break-even:

Break Even

When using a strangle, there are two break even points. Ignoring the cost of commissions, there is a break even point below the strike price of the out-of-the-money put (B1) and above the out-of-the-money call(B2). B2 can be calculated by subtracting the per contract cost from the strike price of the out-of-the-money put. B1 can be calculated by adding the per contract cost to the strike price of the out-of-the-money call. In this particular example we can calculate B1 by subtracting $26.40 from $490, giving us a break even point of $463.60. Similarly, we can calculate B2 by adding $26.40 to $510, giving us a break even point of $536.40.

Profit Loss

Scenario 1: Max Loss

As I mentioned before, my max loss per contract is limited to the absolute cost of the contract. In this particular setup, my max loss is $2640.00. I will experience this max loss if the price of the underlying at expiration is between the strike price of the put and the call. Specifically, I will experience this max loss if the price of the underlying at expiration is between $490.00 and $510.00. In my opinion, this is not likely but could happen if Apple reports earnings consistent with estimates, no misses or beats.

Scenario 2: Loss

If the underlying price change of Apple is not big enough following Apple’s earnings report, I will experience a loss less then my max loss at expiration. This can happen if the price of the underlying is in one of two ranges. The first range is if the underlying price closes below the strike price of the out-of-the-money put, but above b1. Similarly, the second range is if the underlying stock price closes above the strike price of the out-of-the-money call, but below b2. The loss in these situations is equal to difference between the price of the underlying at the sale and the strike price, plus the cost of the contract.

For example, lets say the price of the underlying Apple stock is $520.00 at expiration. Since I am long the $510.00 January weekly, I will be able to buy 100 shares of Apple at $510.00 and sell them on the open market at $520. This means I will make a profit of $10.00 per share. Even though I profit on the sale of the Apple shares on the open market, I am still responsible for the cost of the contract, which is $26.40 per share. This leaves my net loss at $16.40 per share, or $1640.00. As you will notice, this is still a loss but is less then my max loss.

Scenario 3: Profit

This is the most desirable and most likely scenario in my opinion. There are two situations in which I will experience a profit. The first is if the underlying Apple Stock price at expiration is below B1, and the second is if the underlying Apple stock price at expiration is above B2. In the first situation, I will be able to sell the underlying shares higher then market price. In the second situation, I will be able to sell the shares at a higher then market price. If the underlying stock price when I exercise is less then B1, the Profit will be equal to the difference between B1 and the price of the underlying at expiration, minus the per contract cost of the strangle. If the price underlying Apple stock price when I exercise is above B2, the profit will be equal to the different in the underlying price at expiration minus B2, minus the per contract cost.

For example, lets pretend that the price of the underlying Apple stock at expiration is $545.00.Since we are long the $510.00 January weekly, we will be able to buy the underlying at $510.00 and sell at the market price of $545.00. Since we paid $26.40 for the strangle, our per share profit will be $8.60 ($860.00).

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The Week Ahead: 1/21 – 1/25

Earnings Reports

Company Ticker Date Estimate
3M MMM 24-Jan $1.41
Abbot Laboratories ABT 23-Jan $0.72
Apple AAPL 23-Jan $13.45
AT&T T 24-Jan $0.47
Baxter International BAX 24-Jan $1.26
General Dynaics GD 23-Jan $1.92
Google GOOG 22-Jan $10.61
Halliburton Co. HAL 25-Jan $0.61
HoneyWell HON 25-Jan $1.10
IBM IBM 22-Jan $5.25
Johnson & johnson JNJ 22-Jan $1.17
McDonalds MCD 23-Jan $1.33
Microsoft MSFT 24-Jan $0.75
Proctor & Gamble PG 25-Jan $1.11
Travelers TRV 22-Jan $0.17
United Technologies UTX 23-Jan $1.04
Verizion VZ 22-Jan $0.52

Economic Reports

Report Date Time Estimated Level Estimated Percent Change
Existing Home Sales 22-Jan 10:00AM ET 5.1M 1.19%
Jobless Claims 24-Jan 8:30AM ET 360k 6.94%
PMI Manufacturing Index Flash 24-Jan 8:58 AM ET 54 -0.37%
EIA Petroleum Status Report 24-Jan 11:00AM ET
New Home Sales 25-Jan 10:00AM ET 388K 2.92%
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Fun With Correlations

Screen Setup (1192013)

For those of you that do not know my history with regard to trading the financial markets, I’ve delved into a variety of different asset classes:  equities and equity options from November of 2008 to August of 2010, futures from August of 2010 to December of 2011, and foreign exchange from January of 2012 to March of 2012.  Following my short stint with foreign exchange, I decided to step my game up and train under the phenomenal proprietary trading firm SMB Capital this past summer; I can honestly say that without that training and my constant drive and motivation for trading success, I would not be anywhere close to where I am today.  I gained a valuable set of skills from SMB Capital  that I needed in order to truly understand how to navigate my way through the markets on my own, and over the course of my writings with The Invisible Hand, I’ll be showing all of you how I utilize these skills to trade successfully.

If there is one market I’d like to specialize in outside of college, it’s the futures market.  This particular market is dynamic, and in my opinion, is one of the most interesting and challenging markets to follow and trade.  The futures market allows you to spot trends on a macroeconomic, technical, and short-term basis that lets you to determine with accuracy where the markets are going.  My year and a quarter length trading the futures market, as some of you may know through my posts on Young Guns Trading, was grueling:  I started with $6,000.00, turned it into $11,000.00 in a few short months, and after getting some additional capital from my brother and my father, I took a $20,000.00 account and destroyed half of its wealth throughout 2011.  It was atrocious and damn well drove me to insanity.  I had no idea what I was doing wrong, and I was clueless as to how to get back in the game and be profitable; the problem, however, was not what I was doing wrong but rather what I wasn’t doing at all.  I had some pieces of a developing strategy that could have been a force to be reckoned with, but it wasn’t a complete strategy and because of that, I lost ten stacks.   In hindsight, that destructive behavior was a part of my tuition to market education and I wouldn’t change the way I lost that money for the world.  I not only learned about myself, but I also learned about the erratic nature of the markets that I traded:  stock indices, metals, and energy.  After moving back into this space at the beginning of this year and combining it with my equity trading, I’ve added the 10-Year Treasury Note futures to my arsenal of markets that I concentrate on, giving me an edge to cover the largest, most voluminous “slices of the pie.”

Enter the top right monitor seen in the picture above.  My strategy within these markets does not use simple moving averages, it doesn’t use an RSI or MACD crossover play, and it doesn’t focus on waiting for the price to bounce off a Bollinger Band in order to make a trade.  In an upcoming post for my readers at Sang Lucci, I’ll be discussing the idea behind Ten Thousand Hours and in that post, I cover a conversation I had with a Wall Street heavy hitter regarding the advantage of time and information.  Timing is everything when it comes to making a trade, and my strategy focuses on exploiting price discrepancies from futures market to futures market, comparing how they move in relation to each other using two correlation studies on my thinkorswim platform.  The strategy is designed to be simplistic, looking at only the raw data from the level two and time/sales to determine the supply and demand of buyers and sellers in the markets I watch and compare them to each other, attempting to spot inter-market abnormalities and capitalizing on them.  In short, it’s a discretionary tape reading arbitrage strategy that has been flawless since the beginning of 2013.

Let’s go over an example from the overnight session of Monday into Tuesday of this past week.  I was looking at Copper (HG), the 10-Year Treasury Notes (ZN), the S&P 500 (ES), and Gold (GC) in order to determine what kind of overnight activity we’d see after watching the S&P 500 drop back to it’s important 1465.00 technical level that it has continued to hover around for the past week.  The technical levels I was paying close attention to were for HG to hold 3.64 support, ZN to hold 132.02 support, ES to hold 1466.50 resistance, and GC to hold 1670.00 support.  My initial trade was to get long HG based on my thought that ES was going to trade higher, but after watching ES sell off into the Asia cash open, I decided to change my bias to a short market outlook.  After watching the price of GC fluctuate, I was anticipating a breakout in the price and began looking at trades to pair nicely with that breakout and what it meant to the other futures markets.  I came up with the following biases to support the information the market was giving me:

  1. GC Breakout = stay cautious on HG long (during illiquid trading, they tend to trade inversely of each other and thus the trade would be to go long GC and short HG)
  2. GC Breakout = risk off trade, short ES / long ZN

After coming up with these trade biases, I began to look for clues on the tape to help me with my decision and found them when ES  started getting sold on the bid, initially moving the prices in HG and GC lower.  This is where the first bias came to fruition, as a bidder in GC stepped up and held the price nicely around 1670.00, cluing me in that as ES and HG continued selling off that GC was most likely looking to move higher.  The paired trade came with ZN, as there is very rarely a time that ES and ZN trade in the same direction.  With the seller on the tape in ES and HG present, the buyer showing his cards and holding the bid in GC, and ZN holding steady with traders beginning to pay up, I added GC and ZN longs at 1670.90 and 132.055, respectively.  My risk:reward on both trades were approximately 1:3.5, and with the correlation in HG and ES holding up, the trade made sense.  I walked away with seven handles in GC and ten ticks in ZN, with this trade becoming the highlight trade to review this week.

Trade Recap (1142013-1152013)

Paying attention to all of these markets at once may seem like a daunting task:  it’s a 24/7 trading style, it’s very detail-oriented yet incredibly basic, and during times of heavy market activity takes an extreme amount of focus and understanding of how all of these markets connect.  In my next post this week, I’ll be bringing another example and more discussion regarding the Pair Correlation and Pair Ratio indicators thinkorswim has to offer traders looking at capitalizing on price inefficiencies across markets.  We’ll also be taking a look at the tape of one of the markets to breakdown how it moves and its idiosyncrasies when trading during “in-play” time periods.

– ZMoose

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Gun Control Sells Guns

Gun control is not a new issue. Guns have been a part of the American culture since our Revolutionary War. Shooting was an important past time and a rite of passage for young men. Gun control laws have followed close behind the ever-changing American gun culture. Control and regulation has long been a hot-blooded issue in American Politics.

Let’s ignore politics and focus on the facts. With the re-election of President Barack Obama, and his recent executive actions (23) to strengthen gun laws, gun sales have soared. Obama being enlisted for a second tour of duty has led to a gun scare. This is not a fear of guns, but a fear of no guns. Many Americans are afraid that his administration will restrict ownership. This has been a trend since his first election. In fact, in 2009, a Gallup survey showed that 41% of respondents believed that the President would prohibit gun sales. Recently, the NRA has grown suddenly by 250,000 members. The heightened discussion has polarized the issue of gun control.

What does all of this mean for the gun industry? Gun stores and manufactures have seen a drastic increase in sales. Most stores are not able to keep their shelves stocked. They face a constant rush from open to close. Members of the public who have contemplated buying a gun, or buying another gun, are buying now, as they are afraid that their right to buy firearms may not exist in the future. Gun manufacturers have reported a major increase in sales. Smith and Wesson Holdings Corp. has seen 20% sales growth in 2012. They are not the only ones Sturm, Ruger & Co. has seen a recent spike in stock price, with an 11% increase over the past 5 days.

Firearms and ammunition face a sin tax. The government collects an excise on the sale of these items. With the increase in sales since Obama’s election, and the growing concern of gun control, tax revenue has seen sharp growth. Without any major changes, just mere discussion and fear, tax collections have increased.

Is this part of Obama’s stimulus package? Could the heightened discussion be a ploy to help small businesses (i.e. gun stores), or increase government tax revenue? Regardless of motives, this trend will be washed away like Coney Island in the wake of Hurricane Sandy. Discussion will either result in major changes, hurting the industry, or will work its way out of the headlines and the minds of Americans as a new issue takes it place.

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Raise The Roof

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Just one week before the U.S. reached its borrowing limit of $ 16.4 trillion, Treasury Secretary Tim Geithner wrote a letter to congress informing them that he will be taking extraordinary and unconventional measures in order to buy time before the unthinkable happens: The U.S. government defaulting on their debt. This is nothing new to us. Just a couple years ago congress faced the same situation. In 2011 congress waited until the last minute to pass a deal. Furthermore, the deal they passed was merely “kicking the can down the road”. Now, we are faced the same issues we did then and politicians are having the same discussions and making the same demands. Republicans claim that they will not agree to raising the ceiling unless significant spending cuts are made. By rejecting the Republicans’ proposals time after time, the Democrats seem to be procrastinating as long as possible. In a way, they seem to be challenging Republicans. Once they approach the last few days before the deadline, the gravity of the situation will sink in and another deal will likely be made. Bernanke has recently stressed the importance of raising the debt ceiling. By raising the ceiling congress would be allowing the government to pay its current bills. Without raising the ceiling the U.S. would be forced to default on its liabilities. So what does this mean for you?

With so much media coverage it is important to consider the impact on consumer confidence. In 2011 the University of Michigan Consumer Sentiment survey decreased 25% between May and August, when a deal was finally reached. The uncertainty was reflected in the Dow, which decreased about 500 points or 3.9% during this time. Don’t be surprised if we see a similar effect this time around.

As the government approaches the deadline to raise the ceiling, Treasuries will lose value. This puts upward pressure on interest rates, ultimately working against the Fed’s easy money policy. As people feel that default is a greater possibility, their sentiment will be reflected through a slower economic recovery. My advice to you: keep a close eye on the tabloids and pray for congress to raise the roof.

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Rory Mcllroy’s New Deal & Nike’s Stock Price

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In this day and age it is not uncommon for professional athletes to make more from their endorsements than they do their actual athletic performance. In fact, more often then not, big time athletes enjoy endorsement deals equal to two or three times their contract value. Consider the case of Rory Mcllroy. Over the course of his five-year career, Mcllroy has accumulated earnings totaling slightly over 29 million USD. Initially, this appears to be a significant amount of money but this past week Rory signed an endorsement deal that will makes this money seem like chump change. His ten year deal with Nike Golf is valued at close to 200 million USD, or 100 million dollars every five years. Normalized for time, this is roughly three and a half times his current performance salary. From the perspective of Rory Mcllroy everything is well. He gets to wear the latest Nike gear and gets to use the best Nike clubs, but from the perspective of Nike Golf, is this substantial investment in Mcllroy worth it?

What better way to answer this question then to examine Nike’s stock price movement during their sponsorship of golf great Tiger Woods. During his decorated 21-year career, Woods has 74 career PGA tours wins, 14 majors, and spent 623 weeks atop the world golf rankings. With that being said, if anyone could drive the price of Nike’s common stock via the Nike Golf business, it would be him.

Historically, Nike Golf has fluctuated around 3.2% of total Nike revenue. Using this logic, in 1996 when Tiger signed his first Nike Golf endorsement contract, Nike Golf revenue was around 68 million USD. This past fiscal year, Nike Golf reported revenues of 726 million USD. During this time frame, the split and dividend adjusted price of Nike common stock increased from 10.44 USD to around 48.44 USD. This is a 364% increase and if we assume Nike Golf contributed roughly 3 percent of the increase, Nike Golf is responsible for increasing the price of Nike common stock roughly 11% from 1996 to 2012. Using basic math, this means that each of Tiger’s 74 PGA tour wins is responsible for increasing the price of Nike common stock .15%.

Using what we know about Rory’s young career, we can project the number of victories Mcllroy will have during his 10-year deal with Nike. Since turning pro at the age of 18, Rory has won on the PGA tour 6 times. From this, it makes sense that Rory has 1.2 PGA tour victories per year. Assuming Rory can maintain this victory rate, he will have 12 PGA tour wins during from the start to finish of his deal with Nike. Using what we know about how Tiger’s victories affect Nike’s common stock price, it can be concluded that Rory’s 12 victories will increase the price of Nike common stock 1.8%. Using this information, Rory will add .96 USD to the dollar value of Nike’s common stock. Assuming no stock splits (which is unlikely with Nike), this .96 USD change for each of Nike’s 901 Million shares will increase the market cap of Nike by 865 million USD.

At this high level, it is clear that Nike’s 200 million USD investment in the worlds number one is well worth the money.

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