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Why Adidas Will Continue To Go Long

|About: adidas AG ADR (ADDYY)
Summary

I will explain why Adidas’ Q4 results put competitors to shame.

Adidas take second place in US sportswear sales.

Future results will prove that it’s not too late to take action on the stock.

The US sportswear top-spots have been shaken up by recent earnings releases and it is Adidas that looks the most promising going forward. A weak earnings release from Under Armour (NYSE:UAA) on the last day of January saw the stock plummet before being hit by even worse new when Adidas released such strong 2016 earnings yesterday. My case is that the competition will continue to heat up in a very similar way to what we have seen in the last 3 months, creating the opportune time to long the Adidas (OTCQX:ADDYY) brand.

Nike (NYSE:NKE) stills hold the number one rank for the best selling sportswear brand in the US, however following the Adidas earnings release, Under Armour have been pipped for second place. Adidas outperformed the pair and words from their CEO, Kasper Rorsted, suggested that this level of high performance is something that consumers should become accustomed to. Adidas envision driving sales up for the foreseeable future, with an aim to increase by 10-12% by 2020. On top of a sales increase the brand has seen profits increase at an even better rate, usually maximising profit can be achieved via cutting negative costs or improving positive prices but Adidas have done both - making more on average per shoe but also losing less in production costs. Profits were up 40% compared to their previous year results.

With regards to the companies' stocks, the story is very similar to that of their reports. The Nike stock has been rising since their previous earnings report at the end of December with more to come out at the end of March and doesn't appeared to have reacted with much volatility to the Adidas release - down a mere 0.5% or so since the news broke. However, the Under Armour stock hasn't faired so well as of late; following their own report the stock dived around 30%, a drop from roughly $29 per share to sub $21, falling a further 2% on the Adidas news. If this wasn't bad enough on its own, the ADDYY stock reached up to new all-time highs on the day of the release, jumping circa to 10% from $84 per share to $92 and we can expect to see the effect of a post-earnings-drift carry the stock on for the following weeks.

To conclude, I believe that these earnings reports are merely the beginning of a period of growth for Adidas in terms of the US market share, a key data point will be the next set of financials from UAA which are expected to signal further losses which would extend the separation of the two brands. Adidas may begin to target some of Nike's shareholders with the current offer of a higher eps multiple (2.76 vs 2.27 respectively) and a faster growing share price. In the current climate, I recommend buying the ADDYY stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.