By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Possible involvement of activists
It was recently reported in the media that Adidas AG (ADR) (OTCMKTS:ADDYY) (ETR:ADS), a German shoe and sports apparel company, might be the target of activist investors and Daniel Loeb of Third Point LLC, among them. As shares of Adidas AG declined by about 35% from their high of €92.9 back in January, it is understandable that shareholders are dissatisfied with the company. According to media reports, activists might want to remove CEO Herbert Hainer, and possibly spin-off company’s Reebok and TaylorMade units.
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Nike reports earnings
On September 25, 2014, Nike Inc (NYSE:NKE) reported its financial results for the first quarter of fiscal 2015. Company reported excellent results for the quarter, beating analyst estimates both for revenue and earnings. Stock price reacted favorably and next day Nike’s shares were trading 12.2% higher. Comparing Adidas to Nike, one can easily notice relative undervaluation of Adidas: it trades at an EV/EBITDA ratio of x8.6, compared to x18.7 for Nike (based on last full fiscal year) – a 54% discount, while P/E ratio is x15.1, compared to x28.7 for Nike – a discount of 47%.
Adidas’s valuation summary
Based on a recent share price, Adidas AG (ADR) (OTCMKTS:ADDYY) (ETR:ADS) had market capitalization of €12.7 billion. Net debt stood at about €0.4 billion and enterprise value equaled €13.1 billion. Company is currently valued at an EV/EBITDA multiples of x9.9 and x8.6, based on annualized H1 2014 and full 2013 year results, respectively. P/E valuation ratios are currently x18.3 and x15.1, based on results for the same periods. Company’s cash generation is weak and is certainly an area that requires improvement. Adidas paid a dividend of €1.5 per share for 2013, which currently provides an annual dividend yield of 2.5%.
Adidas AG (ADR) (OTCMKTS:ADDYY) (ETR:ADS) shares declined during 2014 from a high of €92.9 to current €60.5, a decline of 35%. Also, company’s shares significantly underperformed its main competitor Nike by 46% and 137% over last 12 months and last 5 years periods. Current valuation discount reflects, of course, weak business performance, but considering the strength of Adidas’s brand and long-term prospects, the discount provides an excellent entry point for long-term value investors.