If you play or watch any type of sport, you would do well not to spot a product made by either Adidas or Nike. Both companies have, for the past 20 or 30 years, dominated the world of sports manufacturing and continue to do so ever more aggressively. If you needed a real life example of the type of rivalry between the two brands, look no further than El Clasico: the annual fixture between Adidas laden Real Madrid and Barcelona, whose kit is of course stitched together by Nike.
Recently, Nike has been the more dominant of the two: with better marketing, increasing market share and consistent product innovation. The World Cup, a gauge of success for both these companies, was won comprehensively by Nike, with social media campaigns generating unparalleled levels of awareness and the company sponsoring more nations than Adidas for the first time (despite Adidas being FIFA’s official kit supplier). The German brand has seen its share price fall by 37% YTD due to geopolitical tensions in Russia and a comprehensive rise in its cost of sales. Nike’s share price is up 14.4% YTD. One would certainly be entitled to call that a thrashing.
However, following Adidas’ 3rd profit warning in a year, things may be starting to turn. Earnings estimates have shyly turned positive over the past month, and the stock outperformed the market and the sector in September by 4% and 8% respectively. Herbert Hainer the CEO and CFO John Stalker have recently completed insider transactions, with both having exemplary track records for buying stock and in the shorter term, the stock has technical support via a Full Stochastic buy signal that has a win rate of 68% .
On a more fundamental level, the firm is forecast to recover, albeit steadily, next year: with sales growth projected at 5.6% and net income rising by 17.4% YoY. Operating margin, which was cut from 8.5% / 9% to 6.5% / 7.0% in August, is forecast to be near on 10% as we approach the end of Q3 and it will be interesting to see whether the company has made such significant adjustments over the course of 4 months.
The firm has recently announced a share buyback equating to €1.5bn, a theme constant with other multinationals around the world, and this could also provide a short term boost to the share price.
Finally, last month, there were rumours circulating that activist hedgefund Third Point was eyeing Adidas as a potential target in order to encourage the business to spin off Reebok and Taylormade Golf- two areas where the company has failed to deliver in the past year. Such intervention may be welcome from investors, alongside a readjustment of the firms exposure to certain European markets. If this, alongside analyst expectation, is anything to go by, Adidas has potential to reverse a miserable 2014 and pull one back against its American counterparts.
Adidas’ current financial position makes it the underdog to Nike, and looking at several OTAS stamps it is easy to see why.
Price outperformance, technical support and front running EPS momentum all suggest that Nike is set to continue its current reign of form at the top of the sportswear league. Valuation may be a cause of concern, however looking back at past instances of overvaluation, the stocks performance has not been hindered in the medium term. Analysts have upgraded their price targets by 10.25% over the past month and short interest remains well within 2 year averages.
At the moment Nike look like the champions of the market, however dismiss Adidas at your peril – they do have Lionel Messi on their side after all….