Puma More Tempting than Adidas

 |  Includes: ADDDF, NKE, PMMAF
by: Véronique Adam

Stock price: €38 ($57.34)

Conclusion: The stock looks fairly valued based on our valuation range of €38-€42 per share. Uncertainty regarding Reebok should prevent short term re-rating. We prefer to invest in Puma (OTCPK:PMMAF) which trades at a similar 15x P/E multiple based on 2010 estimates.

9 months: net sales down 3.7% to €7.9bn (-7% like for like), EBIT down 52% to €465m, net income down 62% to €226m. Full year guidance : €1.15-1.30 EPS (€3.1 EPS in 2008).

A temporary setback for Adidas and Taylor Made

  • 2009: A Perfect Storm

Management confirmed that EPS should fall by 60% in 2009, as a result of unprecedented challenges. Lower demand and downtrading for sporting goods everywhere except in Latin America, combined with excess inventories in the US, Europe and China. Rising input costs, restructuring expenses in Europe and in Asia, integration costs following the acquisition of Ashworth, and structural difficulties at Reebok.
The only good news comes from the cash management, as cash flow from operating activites was €122m vs €100m outflow at the end of Sept. 2008, and net debt decreased €299m to €2.3bn (end Sept).

  • 2010 to benefit from improved costs structure.

Notwithstanding the expected positive impact of the 2010 world cup, Adidas might continue to feel the pressure from low consumer demand, while retailers want inventories to remain under control. However, gross margin in 2010 will benefit from the impact of less inventory clearance combined with lower input costs. In addition, Adidas should reap the fruits of the new operating structure announced in May: elimination of regional offices and implementation of joint operating models in Europe and Latin America.

We expect sales to increase by 3% but EBIT to reach €880m vs €547m projected in 2009, and EPS to rebound to €2.46 per share.

Far less visibility on Reebok
Adidas has not been able to turn around Reebok, acquired in 2005, neither in good nor bad times. We expect Reebok to report €140m losses in 2009. Reebok struggles to find a positioning between iconic brands such as Nike (NYSE:NKE), Adidas and Puma. As a result, pricing power is weak and leads to depressed gross margin (30% vs 46% for the Adidas brand).
We think that management should refocus on Adidas and Taylor Made, which implies a risk of impairment (€425m goodwill in Adidas balance sheet).

Adidas trades at 15.3x P/E and 8.4xEV/EBITDA based on our 2010 estimates, at a slight premium to Puma. We don’t think that Adidas is expensive based on our valuation range. However, investors might prefer to invest in Puma as long as Reebok remains an issue.

Disclosure: No positions