Adidas vs Nike Stock

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Should you buy Adidas and sell Nike?

This year will be marked by a couple of high-profile sports events. Most notably the Summer Olympics in Rio de Janeiro, Brazil, but also the Euro Soccer Championship will draw a lot of attention. For athletic apparel companies it is a good year to draw the spotlight on new collections and the benefits of clothing or shoes from a specific brand. So investors may take a fresh look on sports goods companies. Just before Christmas, we warned that shares of Nike (NKE) are far from cheap and investors should stay clear of adding positions. This week, its main rival Adidas published excellent results. Could that offer an opportunity to switch to maintain a position in the athletic apparel sector?

Adidas Originals in high demand

The German sports goods company presented sales growth of 16.4% during full-year 2015, reaching EUR 16.9 billion (USD 15.4bn). Earnings per share rose a similar 16% and reached EUR 3.54. Adidas saw particular strong demand in its core brand and sales rose 18.4% in the fourth quarter of 2015. Reebok sales grew also, but stayed with 3.8% clear behind. The company from Herzogenaurach does have problems with its golf-division however, with Taylor Made adidas Golf sales shrinking 6.7%. This is nothing new and the company is working on a strategic solution for this division. Some analysts had hoped for an announcement to be made during the earnings release, but the management commented that they will conclude the strategic review by the end of Q1.

Higher sales for the Adidas division were driven by high demand for its Adidas Originals brand, with sales rising 45% during Q4-2015. Some market watchers see the strong performance of the Originals brand with a bit of unease, since products under this name are mostly athleisure, which is very sensitive for trends and may distract focus from Adidas’ core business, real sport products. The latter products also come with higher margins, due to higher sale prices. Fortunately, sale figures guided to a double-digit growth for Running & Football. Demand for these core products may rise further this year, due to the above described key sports events.

Valuations: Adidas vs Nike

As we mentioned in our previous article on Nike, shares of the Oregon-based apparel company are relatively expensive on a price/earnings-base. Though the shares lost a bit of ground since our previous look, shares are valued at roughly 28 times 2016e earnings. That’s well above Adidas that is trading at a p/e of 24. Also when it comes to price/sales, ze Germans are much cheaper: 1.1 vs 3.2 for Nike. Though one should add that Nike shows much better margins. But that’s exactly one of Adidas main strategic targets for the period moving forward: margin improvement. The recent announcement of CEO Herbert Hainer stepping down and former Henkel-CEO Kasper Rorsted taking over underlines the focus on cost cutting and margin improvement. Rorsted has made a name in cost-cutting and may hired to guide Adidas to more efficiency.

Adidas may catch up

As said, Nike shares had a strong run during the recent years. The same can’t be said for shares of Adidas which clearly lagged behind, as the chart below shows.

 

 

The companies are highly comparable from a business-type perspective. Active in the same sector, roughly comparable product lines and strongly competing for the same customers. So one could say the shares should also be treated similar, though reflecting underlying financials. For now, Nike shows better profitability and is rewarded with a higher valuation. Adidas is working on this topic and shareholders may reward the company if it succeeds in doing so. Smart investors could anticipate and overweight Adidas compared to Nike. But if you don’t like the sector, which is understandable due to high valuations, stay away from both.

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