World Cup fever has broken out, even in the U.S., not known as a football (or soccer) powerhouse. The Adidas AG (ADSGn.GE) brand is on the game balls and much of the equipment used in the world’s most popular sporting event. Such global exposure can’t be bad, but Adidas is facing several challenges that equal getting the ball past Lionel Messi. Will investors be yelling “GOAL”?
While Adidas was once the unquestioned leader in soccer equipment and apparel, that is no longer the case. Nike Inc. (NKE.N) now generates $1.9 billion in revenue from soccer gear, approaching the $2.7 billion that Adidas brings in. Adidas and Nike are now competing in more markets than before and Adidas is losing market share in some of its core businesses and geographies, like soccer gear and Europe.
While the Adidas logo is prominently displayed throughout the World Cup, Nike actually sponsors more teams and individual players in the tournament. This arguably resonates more with consumers, as the Nike brand is more closely associated with the teams and players they root for, as opposed to FIFA itself, which is the Adidas connection.
Running downfield
Analysts are taking note of the challenges that Adidas is facing and adjusting estimates accordingly. The StarMine Analyst Revisions Model (ARM) measures analyst sentiment and revision momentum. Adidas has an ARM score of only 16 out of 100, indicating that analysts are becoming more bearish on the company’s fundamentals. As seen below in Exhibit 1, analysts have cut revenue estimates over the past three months, but EBITDA and EPS estimates have actually increased, potentially due to a short-term boost from the World Cup. However, looking further out, analysts have become more pessimistic in their estimates over the past three months, slashing revenue, EBITDA, and EPS estimates for both 2014 and 2015.
Exhibit 1. Analyst Revisions Model Components
Source: Eikon/StarMine
Red card from investors
In addition to negative analyst sentiment, the market doesn’t likeAdidas’ prospects. The stock has underperformed its benchmark by nearly 20 percentage points, year to date, as shown below in Exhibit 2. This underperformance has contributed to the StarMine Price Momentum Model score of 5 out of 100. Adidas scores relatively poorly on the mid-term and long term components of the model, but the industry component is especially weak, with tougher competition and flabby European consumer spending driving down industry returns.
Exhibit 2. Adidas Year-to-Date Stock Return vs. Benchmark
Source: Eikon/StarMine
Ball not rolling
Given the recent underperformance of Adidas stock, potential investors may wonder whether the shares are now cheap. Both StarMine valuation models suggest that this may not be the case. The Relative Valuation Model gives Adidas a score of 25 out of 100, meaning that the stock is relatively expensive based on valuation ratios, compared to other companies. Despite the stagnant stock price, the company is still significantly more expensive than its 10-year median on several valuation measures, as shown below.
Exhibit 3. Adidas Financial Ratios Compared to History
Source: Eikon/StarMine
Market is referee
The Intrinsic Valuation Model suggests that Adidas shares are valued roughly in line with their intrinsic value. Using a dividend discount model, Adidas shares are estimated to be worth €81.53, slightly above the recent closing price of €78.52. For most of the past 10 years, the price has been significantly below its estimated intrinsic value, but the gap has narrowed as analysts have revised estimates downward, reducing the intrinsic value estimate.
Exhibit 4. Adidas Price to Intrinsic Valuation Ratio History
Source: Eikon/StarMine
A long punt
Adidas’ position as an official sponsor of the World Cup is expected to provide a near term boost to sales and brand recognition. However, many of the longer term industry dynamics are not working in the company’s favor, as competitors continue to encroach on previously safe territories. It’s a rough combination – analysts and investors are becoming more bearish on the stock while valuations are still at a premium. Time to get in the game – or sit on the sidelines?
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