Adidas AG (ADS, Financial) was the pick of the footwear stock this year, rising by more than 50% in the last year and in complete contrast with Nike’s (NKE, Financial) sharp decline of 17.25% and Under Armour’s (UA, Financial)(UAA, Financial) dip of 11.74%.
All three companies posted revenue growth this year, but the valuations these companies commanded at the start of 2016 were the real reasons behind Adidas' stock price rising that fast in such a short period of time while Nike and Under Armour declined.
Though the decline was indeed sharp, Nike is still trading at 2.68 times sales and 23 times earnings while Under Armour is trading at 2.38 times sales and 56.45 times earnings. Adidas’ stock price jumped from below $50 at the end of 2015 to the current level above $75. Despite the strong jump in price Adidas is still trading at 1.62 times sales, far lower than the price for which Nike and Under Armour are trading.
The performances of all three companies in the last 12 months had a lot to do with their valuations, as you can see, and they were more corrections than rewards for their growth metrics during this period. Under Armour continued its above-20% growth rate this year even though the company had to revise its full-year estimates downward slightly, but it still expects to hit a 24% growth rate for the year.
Nike stated that it wants to hit $50 billion in sales by 2020, which would have required the company to keep its top line growing at around the 10% range from now through 2020. However, the company was only able to post a 7% revenue growth in the first six months of the current fiscal. Though that was a growth rate that would push back its $50 billion goal by a few quarters, an above-5% growth rate for a company with more than $8 billion in quarterly revenues is no mean achievement.
Although extremely fragmented, the footwear and apparel markets are worth hundreds of billions of dollars with the U.S. market alone worth nearly $350 billion. All three companies operate at the luxury end of the sports footwear and apparel market and have global operations, but the combined annual sales of Nike, Adidas and Under Armour is still less than $60 billion.
Considering the size of the market in which they operate, they can increase their sales for many years to come. Though things will be extremely tight for them in mature markets such as the U.S. and Europe, all three companies have a huge runway in the global market for several more years.
2016 has turned out to be the year when a huge price correction took place in the segment with Adidas increasing its valuation upward and Nike and Under Armour moving downward. From a price to sales perspective Adidas still lags behind the other two, and 2017 may well see that trend continue. All three stocks look attractive considering the amount of growth that is ahead of them.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
