Adidas: Time To Buy This Unloved And Undervalued Stock

| About: adidas AG (ADDYY)


Adidas lowered its full-year guidance last month.

The shares already declined over 40% this year.

Adidas trades at a discount compared to its industry peers.

The recent pullback could be a perfect entry point for investors.

Looking at Adidas (OTCQX:ADDYY), one of the largest sports apparel companies in the world, investors might wonder what happened with this stock over the past eight months of this year. The stock fell over 40% since the start of this year, and closed nearly at the stock's 52-week low last Friday. The poor performance is even more surprising given the fact that Germany, one of Adidas' best selling soccer shirts, won the World Cup this year. Germany defeated Argentina in the final, another national soccer team sponsored by Adidas.

The boost by World Cup-related revenue was not enough for Adidas to achieve its financial objectives for this year. On Thursday July 31, 2014, Adidas warned that its annual revenue and net income will be lower than expected. According to this press release, Adidas now expects net income to be around €650 million ($858 million), down from an earlier estimate that assumed net income to be in the range of €830 million ($1,095 million) to €930 million ($1,227 million).

Adidas named currency translation effects, less favourable hedging rates, higher marketing spend for the 2014 FIFA World Cup, poor retail sentiment and significantly lower contribution from TaylorMade Adidas Golf among the reasons for lowering its full-year guidance. Additionally, sanctions by Western governments against Russia had an impact on the company's results as well.

As I already mentioned before, the stock fell over 40% year-to-date following the poor results in the first six months of this year and the company's profit warning. It seems that investors turned away from Adidas and focused on other, more promising sports apparel stocks, for example Nike (NYSE:NKE), Under Armour (NYSE:UA), Lululemon (NASDAQ:LULU) and Columbia Sportswear (NASDAQ:COLM).

Despite all the bad news, Adidas is still a solid company with good underlying growth potential. Adidas' top-line performance was not that bad at all, for example, net sales increased 10% on a currency-neutral basis in the second quarter of this year. Therefore, the recent decline of Adidas' stock price could provide a good entry point for investors.

On top of Adidas' solid top-line performance, I find that the company trades at an attractive discount compared to industry peers. According to the latest outlook, Adidas still expects to earn $2.05 per share in 2014. This equals a trailing price/earnings ratio of 18.3 times this year's expected earnings per share. Industry peers trade at much higher price/earnings multiples (see graph below).

Company EPS P/E ratio
Adidas $2.05 18.3
Nike $3.39 23.2
Under Armour $0.94 71.2
Lululemon $1.74 22.9
Columbia Sportswear $3.52 21.6

It is clear that Adidas should trade a some discount compared to its industry peers. Due to recent bad news, the risks associated with Adidas are higher. However, I believe that the current discount is just too much. For example, Adidas' trailing P/E ratio is around 21% lower compared to its most important competitor, Nike.

My findings are in line with this recent article by SA author Vin Colby. He concluded:

Buy excellent companies when they are in distress, not when they are riding high. The recent fall in Adidas price, and the accompanying buying opportunity, is so far my greatest find of this year.


Based on my findings above, I believe that Adidas is still an attractive company for investors and the stock's recent pullback is a perfect entry point. Adidas' top-line performance in the second quarter was solid, and the company still earns a healthy profit. The stock's valuation and discount compared to industry peers support my conclusion that the recent pullback is a good entry point.

Disclosure: The author is long NKE.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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