Weekly Valuation – Valutico | 7 November 2022
Adidas AG, is a German sports and lifestyle apparel company, specializing in designing, developing and manufacturing footwear, sports apparel and accessories. Two weeks ago the firm announced that it terminated its contract with the US rapper Ye (formerly known as Kanye West) due to his antisemitic statements. The collaboration included the designing and manufacturing of the Yeezy brand which reached sales of €1.7 billion in 2021. This announcement led to a further 4% fall in the share price last week, so that the share price is now down 65% overall year-on-year. It is also the first time in six years that Adidas is trading below €100 per share.
Recent Financial Performance
Based on second quarter figures, Adidas’ sales increased by 10% to €5.6 billion, with 6% of that being attributable to forex adjustments, thus leaving only 4% growth attributable to an increase in sales volume. Following the publication of these figures, Adidas reduced its growth target from the range of 11%-13% to a mid-to-high single-digit growth figure for the 2022 financial year. The company now expects a profit of €1.3 billion, significantly lower than the €1.8 to €1.9 billion previously anticipated.
Termination of Collaboration with Ye
From 2023 Adidas will no longer sell products under the Yeezy brand. This was a reaction to increasing pressure from the public, resulting from a number of questionable statements by the US rapper Ye. The termination of this collaboration may hit Adidas hard, as Yeezy sales were expected to be between €1.7 billion and €1.8 billion this year, representing 8% of the company’s total sales. However, due to massive demand for these products, Adidas could potentially prevent a drop in sales by relaunching them under a different brand.
In August the long term CEO Kasper Rorsted surprisingly announced he will leave the company at the end of 2022. This announcement also increases uncertainty, especially since the company has not yet found a replacement for the position. Additionally, Adidas is currently suffering from poorly functioning supply chains and the impact of the lockdowns in China.
To analyze Adidas we used the Discounted Cash Flow method, specifically our DCF WACC approach, as well as a Trading Comparables analysis. Our DCF produced a valuation of €44.9 billion using a WACC of 6.3%. This is largely driven by aggressive analyst forecasts, predicting that sales growth will remain in the high single digits but that margins will expand over the next five years. Should these forecasts not come to pass then, of course, the valuation would be adjusted downward.
The Trading Comparable analysis shows a completely different picture for the valuation of Adidas, as it suggests a value between €15.6 billion and €26.2 billion. We came up with this valuation range by using the observed trading multiples EV/EBITDA, EV/EBIT and P/E of peers such as Nike and Puma.
By combining these two approaches we arrive at a fairly wide valuation range of €15.6 billion to €44.9 billion. Given Adidas’ current market capitalization of €18 billion, we can assume that the company is somewhat undervalued, however caution that the uncertain economic environment could reduce the upper end of the range substantially.
This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.